##### 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, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
 GRAYMARK HEALTHCARE, INC.
  OKLAHOMA
    
    20-0180812(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 101 N. Robinson, Ste. 920
Oklahoma City, Oklahoma 73102   (405) 601-5300
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)

    Smaller Reporting Company
þ
 o þ




---



##### 



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
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 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
    
    
    30Registrant's Restated Certificate of IncorporationRegistrant's BylawsCertification of Stanton Nelson, Chief Executive OfficerCertification of Rick D. Simpson, Chief Financial Officer and ControllerCertification Pursuant to Section 1350 - Chief Executive OfficerCertification Pursuant to Section 1350 - Chief Financial Officer
     -i-




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Graymark Healthcare, Inc. Consolidated Condensed Financial Statements
   -1-




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Balance Sheets
(Unaudited)
 June 30,
    
    December 31,2008
    
    2007ASSETSCash and cash equivalents
    
    $
    17,204,120
    
    
    $
    2,072,866Accounts receivable, net of allowance for sales adjustments and
doubtful accounts of $10,329,582 and $5,946,788, respectively
    
    
    12,161,595
    
    
    
    6,485,267Inventories
    
    
    8,342,677
    
    
    
    4,238,670Other current assets
    
    
    106,596
    
    
    
    133,791Total current assets
    
    
    37,814,988
    
    
    
    12,930,594Property and equipment, net
    
    
    4,397,418
    
    
    
    2,069,685Intangible assets, net
    
    
    8,681,088
    
    
    
    5,609,326Goodwill
    
    
    29,370,483
    
    
    
    20,247,905Other assets
    
    
    161,207
    
    
    
    275,127Total assets
    
    $
    80,425,184
    
    
    $
    41,132,637LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    4,353,547
    
    
    $
    4,423,324Accrued liabilities
    
    
    5,169,458
    
    
    
    2,474,404Short-term debt
    
    
    935,494
    
    
    
    13,993,015Current portion of long-term debt
    
    
    3,153,367
    
    
    
    2,394,512Total current liabilities
    
    
    13,611,866
    
    
    
    23,285,255Long-term debt, net of current portion
    
    
    44,224,951
    
    
    
    15,354,584Total liabilities
    
    
    57,836,817
    
    
    
    38,639,839Minority interests
    
    
    499,025
    
    
    
    629,916Shareholders 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; 27,455,314 and 22,190,400 issued and outstanding
at June 30, 2008 and December 31, 2007, respectively
    
    
    2,746
    
    
    
    2,219Paid-in capital
    
    
    26,759,013
    
    
    
    7,286,636Accumulated deficit
    
    
    (4,672,417
    )
    
    
    (5,425,973
    )Total shareholders equity
    
    
    22,089,342
    
    
    
    1,862,882Total liabilities and shareholders equity
    
    $
    80,425,184
    
    
    $
    41,132,637
  -2-




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
For the Three Months Ended June 30, 2008 and 2007
(Unaudited)
 2008
    
    2007Revenues:Product sales
    
    $
    20,141,262
    
    
    $
    9,144,658Services
    
    
    3,131,934
    
    
    
    2,035,49223,273,196
    
    
    
    11,180,150Costs and Expenses:Cost of sales
    
    
    15,136,505
    
    
    
    7,006,557Cost of services
    
    
    1,190,884
    
    
    
    724,498Selling, general and administrative
    
    
    5,253,802
    
    
    
    2,669,134Depreciation and amortization
    
    
    360,711
    
    
    
    179,67721,941,902
    
    
    
    10,579,866Income from continuing operations
    
    
    1,331,294
    
    
    
    600,284Other Income (Expense):Interest expense, net
    
    
    (492,361
    )
    
    
    (456,253
    )Other expense
    
    
    (6,553
    )
    
    
    (498,914
    )
    
    
    (456,253
    )Net income before minority interests and provision for income taxes
    
    
    832,380
    
    
    
    144,031Minority interests
    
    
    (253,992
    )
    
    
    (144,727
    )Net income before provision for income taxes
    
    
    578,388
    
    
    
    (696
    )Provision for income taxes
    
    
    (219,787
    )
    
    
    Net income from continuing operations
    
    
    358,601
    
    
    
    (696
    )Income from discontinued operations
    
    
    9,501
    
    
    
    Net income
    
    $
    368,102
    
    
    $
    (696
    )Net earnings per common share (basic and diluted):Net income from continuing operations
    
    $
    0.01
    
    
    $
    Income from discontinued operations
    
    
    
    
    
    
    Net earnings per share
    
    $
    0.01
    
    
    $
    Average common shares outstanding
    
    
    25,051,905
    
    
    
    20,400,000Dilutive effect of stock warrants and options
    
    
    677,300
    
    
    
    Average common shares outstanding assuming dilution
    
    
    25,729,205
    
    
    
    20,400,000
  -3-




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
 2008
    
    2007Revenues:Product sales
    
    $
    36,657,156
    
    
    $
    16,461,303Services
    
    
    5,659,365
    
    
    
    3,221,07342,316,521
    
    
    
    19,682,376Costs and Expenses:Cost of sales
    
    
    27,439,429
    
    
    
    12,517,373Cost of services
    
    
    2,162,596
    
    
    
    1,086,850Selling, general and administrative
    
    
    9,359,030
    
    
    
    4,655,641Depreciation and amortization
    
    
    667,698
    
    
    
    308,71539,628,753
    
    
    
    18,568,579Income from continuing operations
    
    
    2,687,768
    
    
    
    1,113,797Other Income (Expense):Interest expense, net
    
    
    (1,019,540
    )
    
    
    (756,927
    )Other expense
    
    
    (6,553
    )
    
    
    (1,026,093
    )
    
    
    (756,927
    )Net income before minority interests and provision for income taxes
    
    
    1,661,675
    
    
    
    356,870Minority interests
    
    
    (618,877
    )
    
    
    (291,373
    )Net income before provision for income taxes
    
    
    1,042,798
    
    
    
    65,497Provision for income taxes
    
    
    (320,263
    )
    
    
    Net income from continuing operations
    
    
    722,535
    
    
    
    65,497Income from discontinued operations
    
    
    31,021
    
    
    
    Net income
    
    $
    753,556
    
    
    $
    65,497Net earnings per common share (basic and diluted):Net income from continuing operations
    
    $
    0.03
    
    
    $
    Income from discontinued operations
    
    
    
    
    
    
    Net earnings per share
    
    $
    0.03
    
    
    $
    Average common shares outstanding
    
    
    24,211,407
    
    
    
    20,400,000Dilutive effect of stock warrants
    
    
    677,300
    
    
    
    Average common shares outstanding assuming dilution
    
    
    24,888,707
    
    
    
    20,400,000
  -4-




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
 2008
    
    2007Operating activities:Net income
    
    $
    753,556
    
    
    $
    65,497Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    667,698
    
    
    
    308,715Minority interests
    
    
    618,877
    
    
    
    291,373Stock option compensation
    
    
    158,000
    
    
    
    Loss on disposition of fixed assets
    
    
    64,796
    
    
    
    Changes in assets and liabilities -Accounts receivable
    
    
    (4,634,266
    )
    
    
    (1,899,703
    )Inventories
    
    
    (450,423
    )
    
    
    (279,507
    )Other assets
    
    
    141,115
    
    
    
    (61,246
    )Accounts payable
    
    
    (69,777
    )
    
    
    1,146,345Accrued liabilities
    
    
    2,695,057
    
    
    
    1,343,453Net cash provided by (used in) operating activities
    
    
    (55,367
    )
    
    
    914,927Investing activities:Cash received from acquisitions
    
    
    3,000
    
    
    
    395,038Deposit on acquisition
    
    
    
    
    
    
    1,310,500Purchase of businesses
    
    
    (11,156,165
    )
    
    
    (20,544,017
    )Purchase of property and equipment
    
    
    (500,157
    )
    
    
    (411,952
    )Net cash used in investing activities
    
    
    (11,653,322
    )
    
    
    (19,250,431
    )Financing activities:Issuance of common stock
    
    
    15,988,547
    
    
    
    Capital contributions
    
    
    
    
    
    
    2,990,000Debt proceeds
    
    
    12,740,901
    
    
    
    16,722,115Debt payments
    
    
    (1,757,381
    )
    
    
    (666,266
    )Distributions to minority interests
    
    
    (132,124
    )
    
    
    (254,037
    )Net cash provided by financing activities
    
    
    26,839,943
    
    
    
    18,791,812Net change in cash and cash equivalents
    
    
    15,131,254
    
    
    
    456,308Cash and cash equivalents at beginning of period
    
    
    2,072,866
    
    
    
    805,220Cash and cash equivalents at end of period
    
    $
    17,204,120
    
    
    $
    1,261,528Noncash Investing and Financing Activities:Seller-financing of acquisitions
    
    $
    4,227,772
    
    
    $
    1,790,000Common stock issued to pay-off convertible debt
    
    $
    750,000
    
    
    $
    Common stock and stock options issued to purchase business
    
    $
    960,000
    
    
    $
    Common stock issued to purchase minority interests
    
    $
    1,616,357
    
    
    $
    Cash Paid for Interest and Income Taxes:Interest expense
    
    $
    781,853
    
    
    $
    628,815Income taxes
    
    $
    
    
    
    $
    
  -5-




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Notes to Consolidated Condensed Financial Statements
 For the Periods Ended June 30, 2008 and 2007
     Interim Financial Information
 Consolidation
 Use of estimates
 Revenue recognition
   -6-




---



##### Table of Contents



Accounts receivable
  Goodwill and Intangible Assets
  -7-




---



##### Table of Contents



Discontinued Operations
 RECENT ACCOUNTING PRONOUNCEMENT
 SFAS 141(R) and SFAS 160 Business Combinations Business Combinations Noncontrolling Interests in Consolidated Financial Statements 
an Amendment of ARB N 51
 
    
    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.
    AmountAcquisition
    
    Business
    
    Purchase
    
    
    Financed byDate
    
    Acquired
    
    Price
    
    
    SellerApothecary:January 12, 2008
    
    Rambo Drug (Rambo)
    
    $
    2,558,564
    
    
    $
    1,020,215February 29, 2008
    
    Thrifty White Store 726 (Thrifty)
    
    
    824,910
    
    
    
    99,444March 26, 2008
    
    Newts Pharmacy (Newts)
    
    
    1,381,066
    
    
    
    486,209March 26, 2008
    
    Professional Pharmacy (Professional)
    
    
    942,809
    
    
    
    263,100June 1, 2008
    
    Parkway Drug (Parkway)
    
    
    7,360,998
    
    
    
    1,489,814SDC:April 15, 2008
    
    Minority interests in sleep centers (Minority)
    
    
    1,616,356
    
    
    
    Sleep Center of Waco, Ltd.,Plano Sleep Center, Ltd. andJune 1, 2008
    
    Southlake Sleep Center, Ltd. (Texas Labs)
    
    
    960,000
    
    
    
    June 1, 2008
    
    Nocturna Sleep Center, LLC (Nocturna)
    
    
    2,172,790
    
    
    
    726,190
   Rambo
    
    
    Thrifty
    
    
    Newts
    
    
    Professional
    
    
    ParkwayCash
    
    $
    1,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,000Accounts receivable
    
    
    7,027
    
    
    
    
    
    
    
    3,626
    
    
    
    1,412
    
    
    
    13,706Inventory
    
    
    350,537
    
    
    
    161,950
    
    
    
    395,546
    
    
    
    398,982
    
    
    
    2,346,569Total current assets
    
    
    358,564
    
    
    
    161,950
    
    
    
    399,172
    
    
    
    400,394
    
    
    
    2,362,275Property and equipment
    
    
    33,683
    
    
    
    
    
    
    
    7,500
    
    
    
    5,000
    
    
    
    113,812Intangible assets
    
    
    973,990
    
    
    
    662,960
    
    
    
    462,209
    
    
    
    162,415
    
    
    
    1,062,636Goodwill
    
    
    1,192,327
    
    
    
    
    
    
    
    512,185
    
    
    
    375,000
    
    
    
    3,822,275Net assets acquired
    
    $
    2,558,564
    
    
    $
    824,910
    
    
    $
    1,381,066
    
    
    $
    942,809
    
    
    $
    7,360,998
 -8-




---



##### Table of Contents



Minority
    
    
    Texas Labs
    
    
    NocturnaAccounts receivable
    
    $
    
    
    
    $
    805,627
    
    
    $
    210,664Total current assets
    
    
    
    
    
    
    805,627
    
    
    
    210,664Property and equipment
    
    
    
    
    
    
    1,707,978
    
    
    
    289,651Intangible assets
    
    
    
    
    
    
    
    
    
    
    150,000Goodwill
    
    
    998,712
    
    
    
    556,804
    
    
    
    1,522,475Total assets acquired
    
    
    998,712
    
    
    
    3,070,409
    
    
    
    2,172,790Minority
interest in net tangible assets
    
    
    617,644
    
    
    
    
    
    
    
    Less: debt assumed
    
    
    
    
    
    
    (2,110,409
    )
    
    
    Net assets acquired
    
    $
    1,616,356
    
    
    $
    960,000
    
    
    $
    2,172,790
  2008Pro forma:Net sales
    
    $
    56,993,000Net income
    
    $
    2,352,000
    Apothecary
    
    
    SDC
    
    
    TotalDecember 31, 2007
    
    $
    7,044,551
    
    
    $
    13,203,354
    
    
    $
    20,247,905Business acquisitions
    
    
    5,901,787
    
    
    
    2,079,279
    
    
    
    7,981,066Business acquisitions  contingent consideration
    
    
    142,800
    
    
    
    
    
    
    
    142,800Purchase of minority interests
    
    
    
    
    
    
    998,712
    
    
    
    998,712June 30, 2008
    
    $
    13,089,138
    
    
    $
    16,281,345
    
    
    $
    29,370,483
  -9-




---



##### Table of Contents



UsefulLife
    
    
    Gross
    
    
    Accumulated(Years)
    
    
    Amount
    
    
    Amortization
    
    
    NetApothecary:Customer files
    
    
    15
    
    
    $
    7,483,136
    
    
    $
    (490,637
    )
    
    $
    6,992,499Covenants not to compete
    
    
    3  5
    
    
    
    1,469,244
    
    
    
    (362,266
    )
    
    
    1,106,978SDC:Customer relationships
    
    
    15
    
    
    
    480,000
    
    
    
    (45,333
    )
    
    
    434,667Trademark
    
    
    15
    
    
    
    50,000
    
    
    
    (278
    )
    
    
    49,722Covenants not to compete
    
    
    3
    
    
    
    100,000
    
    
    
    (2,778
    )
    
    
    97,222Total
    
    
    
    
    
    $
    9,582,380
    
    
    $
    (901,292
    )
    
    $
    8,681,088
  Year ended June 30,2009
    
    
    $
    885,0472010
    
    
    
    819,0472011
    
    
    
    816,2692012
    
    
    
    734,6032013
    
    
    
    601,698
   MaturityRate (1)
    
    
    Date
    
    
    2008Apothecary:Senior bank debt
    
    
    5
    %
    
    May 2014
    
    $
    17,403,625$15 million (consolidated) bank line of credit
    
    
    5
    %
    
    July 2014
    
    
    5,217,541Seller financing
    
    
    4.1  7.25
    %
    
    July 2009  June 2011
    
    
    5,832,064Non-compete agreements
    
    
    0.0  7.65
    %
    
    Dec. 2009  May 2013
    
    
    1,207,45829,660,688SDC:Senior bank debt
    
    
    5
    %
    
    May 2014
    
    
    12,582,730
 -10-




---



##### Table of Contents



MaturityRate (1)
    
    
    Date
    
    
    2008$15 million (consolidated) bank line of credit
    
    
    5
    %
    
    June 2014
    
    
    4,055,798Seller financing
    
    
    5
    %
    
    June 2009
    
    
    728,174Sleep center working capital notes payable
    
    
    6.0  8.0
    %
    
    Apr. 2010  Oct. 2011
    
    
    774,071Short-term equipment leases
    
    
    
    
    
    Feb. 2009
    
    
    207,320Capital leases
    
    
    11.0 17.0
    %
    
    Nov. 2012  Oct. 2011
    
    
    189,468Notes payable on vehicles
    
    
    3.0
    %
    
    Nov. 2012
    
    
    115,56318,653,124Total borrowings
    
    
    
    
    
    
    
    
    
    
    48,313,812Less:Short-term debt
    
    
    
    
    
    
    
    
    
    
    (935,494
    )Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    (3,153,367
    )Long-term debt
    
    
    
    
    
    
    
    
    
    $
    44,224,951
 
 (1)
    
    Effective rate as of June 30, 2008  Year ended June 30,2009
    
    
    $
    3,153,3672010
    
    
    
    3,118,4992011
    
    
    
    3,041,9812012
    
    
    
    4,959,0522013
    
    
    
    5,241,153Thereafter
    
    
    
    27,864,266
         -11-




---



##### Table of Contents



1 
   AverageExerciseShares
    
    
    PriceOutstanding at December 31, 2007
    
    
    1,064,650
    
    
    $
    7.15Granted  warrants
    
    
    202,500
    
    
    
    1.47Granted  options
    
    
    125,000
    
    
    
    4.10Exercised
    
    
    (83,850
    )
    
    
    (5.50
    )Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2008
    
    
    1,308,300
    
    
    $
    6.07
   -12-




---



##### Table of Contents



Three Months Ending
    
    Six Months EndingJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Sales to external customers:Apothecary
    
    $
    19,494,459
    
    
    $
    8,700,009
    
    
    $
    35,375,161
    
    
    $
    15,741,888SDC
    
    
    3,778,737
    
    
    
    2,480,141
    
    
    
    6,941,360
    
    
    
    3,940,488Total
    
    $
    23,273,196
    
    
    $
    11,180,150
    
    
    $
    42,316,521
    
    
    $
    19,682,376Segment operating profit (loss):Apothecary
    
    $
    117,793
    
    
    $
    (137,458
    )
    
    $
    181,431
    
    
    $
    (68,354
    )SDC
    
    
    427,869
    
    
    
    136,762
    
    
    
    904,116
    
    
    
    133,851Discontinued operations
    
    
    9,501
    
    
    
    
    
    
    
    31,021
    
    
    
    Other
    
    
    (187,061
    )
    
    
    
    
    
    
    (363,012
    )
    
    
    Total
    
    $
    368,102
    
    
    $
    (696
    )
    
    $
    753,556
    
    
    $
    65,497
 June 30,
    
    
    December 31,2008
    
    
    2007Segment assets:Apothecary
    
    $
    38,080,425
    
    
    $
    21,583,680SDC
    
    
    28,188,179
    
    
    
    18,730,505Discontinued operations
    
    
    209,400
    
    
    
    335,507Other
    
    
    13,947,180
    
    
    
    482,945Total
    
    $
    80,425,184
    
    
    $
    41,132,637
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   -13-




---



##### Table of Contents



Apothecary Operating Segment
    -14-




---



##### Table of Contents



SDC Operating Segment
      -15-




---



##### Table of Contents



Mergers and Acquisitions
   AmountAcquisition
    

Business
    
    Purchase
    
    FinancedDate
    
Acquired
    
    Price
    
    by SellerApothecary:January 12, 2008

    
    Rambo Pharmacy (Rambo)
    
    $
    2,558,564
    
    
    $
    1,020,215February 29, 2008

    

    
    Thrifty White Store 726 (Thrifty)
    
    
    824,910
    
    
    
    99,444March 26, 2008

    


    Newts Pharmacy (Newts)
    
    
    1,381,066
    
    
    
    486,209March 26, 2008
    

    

    Professional Pharmacy (Professional)
    
    
    942,809
    
    
    
    263,100
 -16-




---



##### Table of Contents



AmountAcquisition
    
    
    
    Business
    
    Purchase
    
    FinancedDate
    
    
    
    Acquired
    
    Price
    
    by SellerJune 1, 2008

    
    Parkway Drug (Parkway)
    
    
    7,360,998
    
    
    
    1,489,814SDC:April 15, 2008

    

    
    Minority interests in sleep centers (Minority)
    
    
    1,616,356
    
    
    
    Sleep Center of Waco, Ltd.,Plano Sleep Center, Ltd. andJune 1, 2008
 
    


    Southlake Sleep Center, Ltd. (Texas Labs)
    
    
    960,000
    
    
    
    June 1, 2008
    
    Nocturna Sleep Center, LLC (Nocturna)
    
    
    2,172,790
    
    
    
    726,190
 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
  -17-




---



##### Table of Contents



Comparison of the Three-Month and Six-Month Periods Ended June 30, 2008 and 2007
 Consolidated Totals
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    23,273,196
    
    
    $
    11,180,150
    
    
    $
    42,316,521
    
    
    $
    19,682,376Cost of sales and services
    
    
    16,327,389
    
    
    
    7,731,055
    
    
    
    29,602,025
    
    
    
    13,604,223Operating expenses
    
    
    5,614,513
    
    
    
    2,848,811
    
    
    
    10,026,728
    
    
    
    4,964,356Operating income
    
    
    1,331,294
    
    
    
    600,284
    
    
    
    2,687,768
    
    
    
    1,113,797Net other (expense)
    
    
    (498,914
    )
    
    
    (456,253
    )
    
    
    (1,026,093
    )
    
    
    (756,927
    )Net income before minority interests and
provision for income taxes
    
    
    832,380
    
    
    
    144,031
    
    
    
    1,661,675
    
    
    
    356,870Minority interests
    
    
    (253,992
    )
    
    
    (144,727
    )
    
    
    (618,877
    )
    
    
    (291,373
    )Provision for income taxes
    
    
    (219,787
    )
    
    
    
    
    
    
    (320,263
    )
    
    
    Net income (loss) from continuing
operations
    
    
    358,601
    
    
    
    (696
    )
    
    
    722,535
    
    
    
    65,497Income from discontinued operations
    
    
    9,501
    
    
    
    
    
    
    
    31,021
    
    
    
    Net income (loss)
    
    $
    368,102
    
    
    $
    (696
    )
    
    $
    753,556
    
    
    $
    65,497
 Discussion of Three Month Periods Ended June 30, 2008 and 2007
 Net revenues
 
    
    the seven acquisitions made by our Apothecary operating segment during the six months ended
December 31, 2007 and the six months ended June 30, 2008 resulted in an increase in revenue of
$11.3 million and
    
    the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase
of revenue of $0.6 million related to the one month of operations in the 2nd quarter of 2008.
See the Segment Analysis, below, for additional information.
 Cost of sales and services
 
    
    the seven acquisitions made by our Apothecary operating segment during the six months ended
December 31, 2007 and the six months ended June 30, 2008 resulted in an increase in cost of
sales and services of $8.2 million and
    
    the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase
of cost of sales and services of $0.2 million related to the one month of operations in the
2nd quarter of 2008. See the Segment Analysis, below, for additional information.
 Operating expenses
 Net other expense
 -18-




---



##### Table of Contents



Minority interests
 Provision for income taxes
 Income from discontinued operations
 Net Income or Loss.
 Discussion of Six Month Periods Ended June 30, 2008 and 2007
 Net revenues
 
    
    the seven acquisitions made by our Apothecary operating segment during the six months ended
December 31, 2007 and the six months ended June 30, 2008 which resulted in an increase in
revenue of $20.1 million,
    
    the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase
of revenue of $0.6 million related to the one month of operations in the first six months of
2008 and
    
    the acquisition made by our SDC operating segment on January 31, 2007 resulted in an increase
of revenue of $1.0 million related to six months of operations in 2008 versus five months in
the 1st half of 2007. See the Segment Analysis below, for additional information.
 Cost of sales and services
 
    
    the seven acquisitions made by our Apothecary operating segment during the six months ended
December 31, 2007 and the six months ended June 30, 2008 which resulted in an increase in cost
of sales and services of $15.7 million,
    
    the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase
of cost of sales and services of $0.2 million related to the one month of operations in the
first six months of 2008 and
    
    the acquisition made by our SDC operating segment on January 31, 2007 resulted in an
increase of cost of sales and services of $0.3 million related to six months of operations in
2008 versus five months in the 1st half of 2007. See the Segment Analysis, below, for
additional information.
 Operating expenses
 -19-




---



##### Table of Contents



Net other expense
 Minority interests
 Provision for income taxes
 Income from discontinued operations
 Net income
 Apothecary Operating Segment
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    19,494,459
    
    
    $
    8,700,009
    
    
    $
    35,375,161
    
    
    $
    15,741,888Cost of sales
    
    
    15,023,016
    
    
    
    6,770,341
    
    
    
    27,213,643
    
    
    
    12,213,912Operating expenses
    
    
    3,976,932
    
    
    
    1,875,813
    
    
    
    7,309,353
    
    
    
    3,264,252Operating income
    
    
    494,511
    
    
    
    53,855
    
    
    
    852,165
    
    
    
    263,724Net other (expense)
    
    
    (304,523
    )
    
    
    (191,313
    )
    
    
    (590,314
    )
    
    
    (332,078
    )Net income (loss) before provision for
income taxes
    
    $
    189,988
    
    
    $
    (137,458
    )
    
    $
    261,851
    
    
    $
    (68,354
    )
 Discussion of Three Month Periods Ended June 30, 2008 and 2007
 Net revenues
 Cost of sales
 -20-




---



##### Table of Contents



Operating expenses
 
    
    approximately $2.0 million in additional expenses associated with new pharmacy locations,
    
    $0.1 million in decreased costs at existing (or same store) locations and
    
    $0.2 million in increased operational overhead.
 Net other expense
 Net income or loss before provision for income taxes.
 Discussion of Six Month Periods Ended June 30, 2008 and 2007
 Net revenues
 Cost of sales
 Operating expenses
 
    
    approximately $3.5 million in additional expenses associated with new pharmacy locations,
    
    $0.1 million in increased costs at existing (or same store) locations and
    
    $0.4 million in increased operational overhead.
 Net other expense
 -21-




---



##### Table of Contents



Net income or loss before provision for income taxes.
 SDC Operating Segment
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    3,778,737
    
    
    $
    2,480,141
    
    
    $
    6,941,360
    
    
    $
    3,940,488Cost of sales and services
    
    
    1,304,373
    
    
    
    960,714
    
    
    
    2,388,382
    
    
    
    1,390,311Operating expenses
    
    
    1,308,741
    
    
    
    972,998
    
    
    
    2,167,400
    
    
    
    1,700,104Operating income
    
    
    1,165,623
    
    
    
    546,429
    
    
    
    2,385,578
    
    
    
    850,073Net other (expense)
    
    
    (221,519
    )
    
    
    (264,940
    )
    
    
    (461,836
    )
    
    
    (424,849
    )Net income before minority interests
and provision for income taxes
    
    
    944,104
    
    
    
    281,489
    
    
    
    1,923,742
    
    
    
    425,224Minority interests
    
    
    (253,992
    )
    
    
    (144,727
    )
    
    
    (618,877
    )
    
    
    (291,373
    )Net income (loss) before provision for
income taxes
    
    $
    690,112
    
    
    $
    136,762
    
    
    $
    1,304,865
    
    
    $
    133,851
 Discussion of Three Month Periods Ended June 30, 2008 and 2007
 Net revenues
 
    
    the acquisition of Nocturna and Texas Labs on June 1, 2008 resulted in an increase in net
revenues of approximately $0.6 million and
    
    an increase in the number of sleep studies performed, in existing locations, in the 2nd
quarter of 2008, compared with the same period in 2007, resulted in an increase in net
revenues of approximately $0.7 million.
 Cost of sales and services
 
    
    the acquisition of Nocturna and Texas Labs on June 1, 2008 resulted in an increase in cost of
sales and services of approximately $0.2 million and
    
    an increase in the number of sleep studies performed, in existing locations, in the 2nd
quarter of 2008 compared with the same period in 2007, resulted in an increase in cost of
sales and services of approximately $0.1 million.
  Operating
expenses
 Net other expense
 -22-




---



##### Table of Contents



Minority interests
 Net income or loss before provision for income taxes
 Discussion of Six Month Periods Ended June 30, 2008 and 2007
 Net revenues
 
    
    the acquisition of our sleep operations on January 31, 2007 that resulted in only five months
of operations during the first six months of 2007, compared with six months of operations
ended June 30, 2008, resulted in an increase in net revenues of approximately $1.0 million,
    
    the acquisition of Nocturna and Texas Labs on June 1, 2008 resulted in an increase in net
revenues of approximately $0.6 million and
    
    an increase in the number of sleep studies performed, in existing locations, in the five
months ended June 30 2008, compared with the same period in 2007, resulted in an increase in
net revenues of approximately $1.4 million.
 Cost of sales and services
 
    
    the acquisition of our sleep operations on January 31, 2007, which resulted in only five
months of operations during the first six months of 2007, compared with six months of
operations ended June 30, 2008, resulted in an increase in cost of sales and services of
approximately $0.3 million,
    
    the acquisition of Nocturna and Texas Labs on June 1, 2008 resulted in an increase in cost of
sales and services of approximately $0.2 million and
    
    an increase in the number of sleep studies performed, in existing locations, in the five
months ended June 30 same period in 2007, resulted in an increase in cost of sales and
services of approximately $0.5 million.
  Operating expenses
 -23-




---



##### Table of Contents



Net other expense
 Minority interests
 Net income or loss before provision for income taxes
 Liquidity and Capital Resources
      -24-




---



##### Table of Contents



Financial Commitments
   < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years
    
    
    TotalShort-term debt
    
    $
    935,494
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    935,494Long-term debt
    
    
    5,084,310
    
    
    
    8,309,650
    
    
    
    13,734,847
    
    
    
    32,127,964
    
    
    
    59,256,771Operating leases
    
    
    1,113,298
    
    
    
    2,047,966
    
    
    
    655,649
    
    
    
    693,494
    
    
    
    4,510,407$
    7,133,102
    
    
    $
    10,357,616
    
    
    $
    14,390,496
    
    
    $
    32,821,458
    
    
    $
    64,702,672
 Accounting Methods
   Recent Accounting Pronouncements
 SFAS 141(R) and SFAS 160 Business Combinations Business Combinations Noncontrolling Interests in Consolidated Financial Statements  an Amendment
of ARB No. 51
 -25-




---



##### Table of Contents




    
    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.
  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.
  
 Item 4. Controls and Procedures and Item 4T. Controls and Procedures.
  -26-




---



##### Table of Contents




    
    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 Billing and Reporting at SDC Holding
  
    
    Our billing system was aging the accounts receivable based on date of billing rather than
date of service and
    
    Lack of appropriate collection procedures needed to identify and follow-up on insurance
company and patient receivables that are not collected in a timely manner.
  
 -27-




---



##### Table of Contents



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 9, 2004.
 -28-




---



##### Table of Contents



Exhibit No.
    
    Description3.2
    
    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
    
    Redeemable Warrant Agreement between UMB Bank, N.A. and Registrant,
incorporated by reference to Exhibit 4.4 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 Redeemable Warrant Certificate, incorporated by reference to Exhibit
4.5 of Registrants Registration Statement on Form SB-2 (No. 333-111819) as filed with
the Commission on January 9, 2004.4.4
    
    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,
2004.4.5
    
    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, 2005.4.6
    
    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, 2005.4.7
    
    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, 2005.4.8
    
    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 Rick D. Simpson, 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 Rick D. Simpson, Chief Financial Officer and
Controller of Registrant.
 -29-




---



##### Table of Contents



SIGNATURES
  GRAYMARK HEALTHCARE, INC.
(Registrant)By:
    /S/STANTON NELSONStanton NelsonDate: August 13, 2008
    
    Chief Executive OfficerBy:
    /S/RICK D. SIMPSONRick D. SimpsonDate: August 13, 2008
    
    Chief Financial Officer and Controller -30-