##### 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 September 30, 2010
 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
    
    20-0180812(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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
    
    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 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
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4. Controls and Procedures and Item 4T. Controls and Procedures
    
    
    32Part II. Other InformationItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. (Removed and Reserved)
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    37Exhibit 10.3Exhibit 10.4Exhibit 31.1Exhibit 31.2Exhibit 31.3Exhibit 32.1Exhibit 32.2Exhibit 32.3
      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)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCash and cash equivalents
    
    $
    533,770
    
    
    $
    1,093,645Accounts receivable, net of allowance for contractual adjustments and
doubtful accounts of $5,507,284 and $9,772,580, respectively
    
    
    3,150,279
    
    
    
    4,057,959Inventories
    
    
    616,643
    
    
    
    351,585Current assets from discontinued operations
    
    
    16,020,079
    
    
    
    16,312,028Other current assets
    
    
    757,696
    
    
    
    532,323Total current assets
    
    
    21,078,467
    
    
    
    22,347,540Property and equipment, net
    
    
    4,095,777
    
    
    
    5,318,680Intangible assets, net
    
    
    5,700,753
    
    
    
    5,871,578Goodwill
    
    
    20,516,894
    
    
    
    20,516,894Other assets from discontinued operations
    
    
    20,347,654
    
    
    
    21,087,323Other assets
    
    
    435,563
    
    
    
    725,262Total assets
    
    $
    72,175,108
    
    
    $
    75,867,277LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    826,950
    
    
    $
    342,362Accrued liabilities
    
    
    1,300,400
    
    
    
    1,752,598Short-term debt
    
    
    
    
    
    
    195,816Current portion of long-term debt
    
    
    767,101
    
    
    
    480,201Current liabilities from discontinued operations
    
    
    11,069,539
    
    
    
    7,890,407Total current liabilities
    
    
    13,963,990
    
    
    
    10,661,384Long-term debt, net of current portion
    
    
    21,649,925
    
    
    
    22,215,875Liabilities from discontinued operations
    
    
    22,555,977
    
    
    
    23,694,319Total liabilities
    
    
    58,169,892
    
    
    
    56,571,578Equity: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; 28,974,884 and 28,989,145 issued and outstanding
at September 30, 2010 and December 31, 2009, respectively
    
    
    2,898
    
    
    
    2,899Paid-in capital
    
    
    29,446,757
    
    
    
    29,086,750Accumulated deficit
    
    
    (15,416,999
    )
    
    
    (9,869,471
    )Total Graymark Healthcare shareholders equity
    
    
    14,032,656
    
    
    
    19,220,178Noncontrolling interest
    
    
    (27,440
    )
    
    
    75,521Total equity
    
    
    14,005,216
    
    
    
    19,295,699Total liabilities and shareholders equity
    
    $
    72,175,108
    
    
    $
    75,867,277
   2




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
 For the Three Months Ended September 30, 2010 and 2009
 (Unaudited)
 2010
    
    
    2009Net Revenues:Services
    
    $
    4,115,610
    
    
    $
    3,467,377Product sales
    
    
    1,358,802
    
    
    
    1,666,7985,474,412
    
    
    
    5,134,175Costs and Expenses:Cost of services
    
    
    1,349,730
    
    
    
    1,215,162Cost of sales
    
    
    435,348
    
    
    
    257,772Selling, general and administrative
    
    
    4,174,956
    
    
    
    3,463,438Bad debt expense
    
    
    374,689
    
    
    
    794,586Depreciation and amortization
    
    
    344,366
    
    
    
    271,310Impairment of fixed assets
    
    
    762,224
    
    
    
    7,441,313
    
    
    
    6,002,268Other Income (Expense):Interest expense, net
    
    
    (342,345
    )
    
    
    (249,158
    )Other (expense)
    
    
    
    
    
    
    (27,290
    )(342,345
    )
    
    
    (276,448
    )Income (loss) from continuing operations, before taxes
    
    
    (2,309,246
    )
    
    
    (1,144,541
    )Benefit (provision) for income taxes
    
    
    (9,603
    )
    
    
    Income (loss) from continuing operations, net of taxes
    
    
    (2,318,849
    )
    
    
    (1,144,541
    )Discontinued operations, net of taxes
    
    
    (1,512,155
    )
    
    
    327,868Net income (loss)
    
    
    (3,831,004
    )
    
    
    (816,673
    )Less: Net income (loss) attributable to noncontrolling interests
    
    
    (61,233
    )
    
    
    25,819Net income (loss) attributable to Graymark Healthcare
    
    $
    (3,769,771
    )
    
    $
    (842,492
    )Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    (0.08
    )
    
    $
    (0.04
    )Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    (0.05
    )
    
    
    0.01Net income (loss) attributable to
Graymark Healthcare common shareholders
    
    $
    (0.13
    )
    
    $
    (0.03
    )Average common shares outstanding (basic and diluted)
    
    
    28,978,063
    
    
    
    28,155,573
   3




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
 For the Nine Months Ended September 30, 2010 and 2009
 (Unaudited)
 2010
    
    
    2009Net Revenues:Services
    
    $
    13,482,800
    
    
    $
    8,691,627Product sales
    
    
    4,014,713
    
    
    
    2,758,26117,497,513
    
    
    
    11,449,888Costs and Expenses:Cost of services
    
    
    4,206,611
    
    
    
    2,948,431Cost of sales
    
    
    1,130,617
    
    
    
    563,841Selling, general and administrative
    
    
    13,041,705
    
    
    
    8,254,778Bad debt expense
    
    
    1,155,583
    
    
    
    3,679,737Depreciation and amortization
    
    
    1,040,891
    
    
    
    761,758Impairment of fixed assets
    
    
    762,224
    
    
    
    21,337,631
    
    
    
    16,208,545Other Income (Expense):Interest expense, net
    
    
    (913,031
    )
    
    
    (593,604
    )Other (expense)
    
    
    (6,249
    )
    
    
    (22,776
    )(919,280
    )
    
    
    (616,380
    )Income (loss) from continuing operations, before taxes
    
    
    (4,759,398
    )
    
    
    (5,375,037
    )Benefit (provision) for income taxes
    
    
    (47,192
    )
    
    
    208,000Income (loss) from continuing operations, net of taxes
    
    
    (4,806,590
    )
    
    
    (5,167,037
    )Discontinued operations, net of taxes
    
    
    (623,399
    )
    
    
    1,279,707Net income (loss)
    
    
    (5,429,989
    )
    
    
    (3,887,330
    )Less: Net income (loss) attributable to noncontrolling interests
    
    
    (95,961
    )
    
    
    (241,768
    )Net income (loss) attributable to Graymark Healthcare
    
    $
    (5,334,028
    )
    
    $
    (3,645,562
    )Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    (0.16
    )
    
    $
    (0.18
    )Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    (0.02
    )
    
    
    0.05Net income (loss) attributable to
Graymark Healthcare common shareholders
    
    $
    (0.18
    )
    
    $
    (0.13
    )Average common shares outstanding (basic and diluted)
    
    
    28,991,304
    
    
    
    28,116,089
   4




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Cash Flows
 For the Nine Months Ended September 30, 2010 and 2009
 (Unaudited)
 2010
    
    
    2009Operating activities:Net income (loss)
    
    $
    (5,334,028
    )
    
    $
    (3,645,562
    )Less: Net income (loss) from discontinued operations
    
    
    (623,399
    )
    
    
    1,279,707Net income(loss) from continuing operations
    
    
    (4,710,629
    )
    
    
    (4,925,269
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,040,891
    
    
    
    761,758Noncontrolling interests
    
    
    (95,961
    )
    
    
    (241,768
    )Stock-based compensation, net of cashless vesting
    
    
    360,006
    
    
    
    186,489Bad debt expense
    
    
    1,155,583
    
    
    
    3,679,737Impairment of fixed assets
    
    
    762,224
    
    
    
    Changes in assets and liabilities -Accounts receivable
    
    
    (376,789
    )
    
    
    (576,282
    )Inventories
    
    
    (265,058
    )
    
    
    (121,244
    )Other assets
    
    
    64,326
    
    
    
    (661,456
    )Accounts payable
    
    
    484,588
    
    
    
    (109,766
    )Accrued liabilities
    
    
    (452,198
    )
    
    
    (410,128
    )Net cash (used in) operating activities from continuing operations
    
    
    (2,117,631
    )
    
    
    (2,417,929
    )Net cash provided by operating activities from discontinued operations
    
    
    3,630,692
    
    
    
    504,313Net cash provided by (used in) operating activities
    
    
    1,513,061
    
    
    
    (1,913,616
    )Investing activities:Cash received from acquisitions
    
    
    
    
    
    
    259,163Purchase of businesses
    
    
    
    
    
    
    (9,056,000
    )Purchase of property and equipment
    
    
    (530,355
    )
    
    
    (722,592
    )Disposal of property and equipment
    
    
    120,969
    
    
    
    Net cash (used in) investing activities from continuing operations
    
    
    (409,386
    )
    
    
    (9,519,429
    )Net cash (used in) investing activities from discontinued operations
    
    
    (50,054
    )
    
    
    (205,795
    )Net cash (used in) investing activities
    
    
    (459,440
    )
    
    
    (9,725,224
    )Financing activities:Debt proceeds
    
    
    16,819
    
    
    
    5,339,587Debt payments
    
    
    (491,685
    )
    
    
    (2,221,278
    )Distributions to noncontrolling interests, net of contributions
    
    
    (7,000
    )
    
    
    (12,142
    )Net cash provided by (used in) financing activities from continuing operations
    
    
    (481,866
    )
    
    
    3,106,167Net cash (used in) financing activities from discontinued operations
    
    
    (1,514,081
    )
    
    
    (2,562,235
    )Net cash provided by (used in) financing activities
    
    
    (1,995,947
    )
    
    
    543,932Net change in cash and cash equivalents
    
    
    (942,326
    )
    
    
    (11,094,908
    )Cash and cash equivalents at beginning of period
    
    
    1,890,606
    
    
    
    15,380,310Cash and cash equivalents at end of period
    
    
    948,280
    
    
    
    4,285,402Cash and cash equivalents of discontinued operations at end of period
    
    
    414,510
    
    
    
    1,554,548Cash and cash equivalents of continuing operations at end of period
    
    $
    533,770
    
    
    $
    2,730,854Cash Paid for Interest and Income Taxes:Interest expense
    
    $
    1,909,000
    
    
    $
    1,747,000Income taxes
    
    $
    32,000
    
    
    $
    39,000
   5




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GRAYMARK HEALTHCARE, INC.
 
 Notes to Consolidated Condensed Financial Statements
 For the Periods Ended September 30, 2010 and 2009
      Interim Financial Information
 Reclassifications
 Consolidation
  6




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Use of estimates
 Revenue recognition -
      7




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Cost of Services and Sales
 Restricted cash
 Accounts receivable
     8




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September 30,
    
    
    December 31,2010
    
    
    2009Allowance for contractual adjustments
    
    $
    3,337,338
    
    
    $
    6,150,557Allowance for doubtful accounts
    
    
    2,169,946
    
    
    
    3,622,023Total
    
    $
    5,507,284
    
    
    $
    9,772,580
  Contractual
    
    
    DoubtfulAdjustments
    
    
    Accounts
    
    
    TotalBalance at December 31, 2009
    
    $
    6,150,557
    
    
    $
    3,622,023
    
    
    $
    9,772,580Provisions
    
    
    16,949,076
    
    
    
    1,546,203
    
    
    
    18,495,279Write-offs, net of recoveries
    
    
    (19,762,295
    )
    
    
    (2,485,389
    )
    
    
    (22,247,684
    )Change in accounting method (see Note 3)
    
    
    
    
    
    
    (512,891
    )
    
    
    (512,891
    )Balance at September 30, 2010
    
    $
    3,337,338
    
    
    $
    2,169,946
    
    
    $
    5,507,284
  Goodwill and Intangible Assets
  Earnings (loss) per share
  9




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Fair value of financial instruments
 Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
    Issued Guidance
   10




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Accounts receivable
    
    $
    796,768Allowance for doubtful accounts
    
    
    (512,891
    )Less: Rental inventory established
    
    
    70,377Adjustment to accumulated deficit
    
    $
    213,500
     11




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Somni
    
    
    EasternCash and cash equivalents
    
    $
    225,774
    
    
    $
    33,389Accounts receivable
    
    
    1,002,334
    
    
    
    455,120Inventories
    
    
    78,358
    
    
    
    6,307Other current assets
    
    
    36,299
    
    
    
    Total current assets
    
    
    1,342,765
    
    
    
    494,816Property and equipment
    
    
    1,060,362
    
    
    
    157,109Intangible assets
    
    
    1,455,000
    
    
    
    3,991,000Goodwill
    
    
    3,747,379
    
    
    
    163,730Total assets acquired
    
    
    7,605,506
    
    
    
    4,806,655Less: Liabilities assumed:Accounts payable and
accrued liabilities
    
    
    548,197
    
    
    
    39,497Short-term debt
    
    
    501,667
    
    
    
    Long-term debt
    
    
    655,642
    
    
    
    67,158Total liabilities assumed
    
    
    1,705,506
    
    
    
    106,655Net assets acquired
    
    $
    5,900,000
    
    
    $
    4,700,000
  Three Months
    
    
    Nine monthsEnding
    
    
    Ending9/30/2009
    
    
    9/30/2009Supplemental Pro Forma:Revenues
    
    $
    7,051,293
    
    
    $
    19,142,221Earnings
    
    $
    (626,782
    )
    
    $
    (2,868,231
    )Net income per common share
(basic and diluted)
    
    $
    (0.02
    )
    
    $
    (0.10
    )
     12




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Severance and payroll costs
    
    $
    493,000Lease termination costs
    
    
    860,000Equipment removal and lease termination costs
    
    
    119,000Total charge
    
    $
    1,472,000
   Three Months Ending
    
    
    Nine Months EndingSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    21,763,674
    
    
    $
    22,202,609
    
    
    $
    65,599,725
    
    
    $
    66,643,918Income (loss) before taxes
    
    $
    (39,706
    )
    
    $
    327,868
    
    
    $
    844,473
    
    
    $
    1,279,707Income tax (provision)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
of discontinued operations
    
    
    (39,783
    )
    
    
    327,868
    
    
    
    848,973
    
    
    
    1,279,707Estimated (charges) incurred
on sale of business
    
    
    (1,472,372
    )
    
    
    
    
    
    
    (1,472,372
    )
    
    
    Income (loss) from discontinued
operations, net of tax
    
    $
    (1,512,155
    )
    
    $
    327,868
    
    
    $
    (623,399
    )
    
    $
    1,279,707
  13




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September 30,
    
    
    December 31,2010
    
    
    2009Cash and cash equivalents
    
    $
    414,510
    
    
    $
    796,961Accounts receivable, net of allowances
    
    
    6,875,805
    
    
    
    7,421,407Inventories
    
    
    8,100,271
    
    
    
    7,882,717Other current assets
    
    
    629,493
    
    
    
    210,943Total current assets
    
    
    16,020,079
    
    
    
    16,312,028Fixed assets, net
    
    
    834,422
    
    
    
    992,481Intangible assets, net
    
    
    6,424,094
    
    
    
    7,005,704Goodwill
    
    
    13,089,138
    
    
    
    13,089,138Total noncurrent assets
    
    
    20,347,654
    
    
    
    21,087,323Total assets
    
    $
    36,367,732
    
    
    $
    37,399,351Payables and accrued liabilities
    
    $
    5,512,745
    
    
    $
    6,107,109Other current liabilities
    
    
    4,149,235
    
    
    
    Current portion of long-term debt
    
    
    1,407,559
    
    
    
    1,783,298Total current liabilities
    
    
    11,069,539
    
    
    
    7,890,407Long-term debt
    
    
    22,555,977
    
    
    
    23,694,319Total liabilities
    
    $
    33,625,516
    
    
    $
    31,584,726
     Useful
    
    September 30, 2010
    
    
    December 31,Life
    
    Gross
    
    
    Accumulated
    
    
    
    
    
    
    2009(Years)
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    NetCustomer relationships
    
    Indefinite
    
    $
    3,870,000
    
    
    $
    
    
    
    $
    3,870,000
    
    
    $
    3,870,000Customer relationships
    
    8  15
    
    
    1,450,000
    
    
    
    (203,460
    )
    
    
    1,246,540
    
    
    
    1,338,969Covenants not to compete
    
    3  15
    
    
    295,000
    
    
    
    (126,346
    )
    
    
    168,654
    
    
    
    218,475Trademark
    
    10  15
    
    
    271,000
    
    
    
    (31,719
    )
    
    
    239,281
    
    
    
    258,356Payor contracts
    
    15
    
    
    190,000
    
    
    
    (13,722
    )
    
    
    176,278
    
    
    
    185,778Total
    
    
    
    $
    6,076,000
    
    
    $
    (375,247
    )
    
    $
    5,700,753
    
    
    $
    5,871,578
  14




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Twelve months endedSeptember 30,2011
    
    $
    213,0002012
    
    
    196,0002013
    
    
    170,0002014
    
    
    170,0002015
    
    
    168,000
   Maturity
    
    September 30,
    
    
    December 31,Rate (1)
    
    Date
    
    2010
    
    
    2009Senior bank debt
    
    6%
    
    May 2014
    
    $
    12,596,375
    
    
    $
    12,596,375Bank line of credit
    
    6%
    
    Aug. 2015
    
    
    9,002,341
    
    
    
    9,002,341Sleep center notes payable
    
    3.75  8.75%
    
    July 2011  Jan. 2015
    
    
    276,233
    
    
    
    467,835Notes payable on equipment
    
    6  14%
    
    April 2012  Dec. 2013
    
    
    452,369
    
    
    
    570,947Notes payable on vehicles
    
    2.9  3.9%
    
    Nov. 2012   Dec. 2013
    
    
    69,670
    
    
    
    104,764Capital leases
    
    11.4%
    
    Nov. 2010
    
    
    18,759
    
    
    
    81,314Short-term insurance premium financing
    
    7.5%
    
    Nov. 2010
    
    
    1,279
    
    
    
    68,316Total borrowings
    
    
    
    
    
    
    22,417,026
    
    
    
    22,891,892Less:Short-term debt
    
    
    
    
    
    
    
    
    
    
    (195,816
    )Current portion of long-term debt
    
    
    
    
    
    
    (767,101
    )
    
    
    (480,201
    )Long-term debt
    
    
    
    
    
    $
    21,649,925
    
    
    $
    22,215,875
 (1)
    
    Effective rate as of September 30, 2010  Twelve months endedSeptember 30,2011
    
    $
    767,0002012
    
    
    2,269,0002013
    
    
    2,815,0002014
    
    
    12,728,0002015
    
    
    679,000Thereafter
    
    
    3,159,000
   15




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##### Table of Contents




    
    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.
 If the Company were to acquire another company or its business, the net income of the
acquired company and the Companys new debt service associated with acquiring the company
may both be excluded from the Debt Service Coverage Ratio, at the option of the Company.
        16




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17




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
     
    
    Referral:Our medical directors, who are board-certified physicians in sleep
medicine, have forged strong relationships with referral sources, which include primary
care physicians, as well as physicians from a wide variety of other specialties and
dentists.
 
    
    Diagnosis:We own and operate sleep testing clinics that diagnose the full
range of sleep disorders including OSA, insomnia, narcolepsy and restless legs
syndrome.
 
    
    CPAP Device Supply:We sell CPAP devices, which are used to treat OSA.
 
    
    Re-Supply:We offer a re-supply program for our patients and other CPAP users
to obtain the required components for their CPAP devices that must be replaced on a
regular basis.
 
    
    Care Management:We provide continuing care to our patients led by our medical
directors who are board-certified physicians in sleep medicine and their staff.
   18




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Discontinued Operations
    Results of Operations
   19




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##### Table of Contents



Comparison of the Three and Nine Month Periods Ended September 30, 2010 and 2009
 For the Three Months Ended
    
    
    For the Nine months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    5,474,412
    
    
    $
    5,134,175
    
    
    $
    17,497,513
    
    
    $
    11,449,888Cost of services and sales
    
    
    1,785,078
    
    
    
    1,472,934
    
    
    
    5,337,228
    
    
    
    3,512,272Operating expenses
    
    
    4,519,322
    
    
    
    3,734,748
    
    
    
    14,082,596
    
    
    
    9,016,536Bad debt expense
    
    
    374,689
    
    
    
    794,586
    
    
    
    1,155,583
    
    
    
    3,679,737Impairment of fixed assets
    
    
    762,224
    
    
    
    
    
    
    
    762,224
    
    
    
    Net other income (expense)
    
    
    (1,104,569
    )
    
    
    (276,448
    )
    
    
    (1,681,504
    )
    
    
    (616,380
    )Income (loss) from continuing
operations, before taxes
    
    
    (2,309,246
    )
    
    
    (1,144,541
    )
    
    
    (4,759,398
    )
    
    
    (5,375,037
    )Benefit (provision) for income taxes
    
    
    (9,603
    )
    
    
    
    
    
    
    (47,192
    )
    
    
    208,000Income (loss) from continuing
operations, net of taxes
    
    
    (2,318,849
    )
    
    
    (1,144,541
    )
    
    
    (4,806,590
    )
    
    
    (5,167,037
    )Discontinued operations, net of taxes
    
    
    (1,512,155
    )
    
    
    327,868
    
    
    
    (623,399
    )
    
    
    1,279,707Net income (loss)
    
    
    (3,831,004
    )
    
    
    (816,673
    )
    
    
    (5,429,989
    )
    
    
    (3,887,330
    )Less: Noncontrolling interests
    
    
    (61,233
    )
    
    
    25,819
    
    
    
    (95,961
    )
    
    
    (241,768
    )Net income (loss) attributable to
Graymark Healthcare
    
    $
    (3,769,771
    )
    
    $
    (842,492
    )
    
    $
    (5,334,028
    )
    
    $
    (3,645,562
    )
 Discussion of Three Month Periods Ended September 30, 2010 and 2009
 Net revenues
 
    
    a decrease in revenues from existing sleep center locations of approximately
$1.3 million during the third quarter of 2010, compared with the same period in 2009.
Revenues from sleep diagnostic services at existing locations declined $0.7 million
primarily due to lower volumes compared to the same quarter in 2009. Additionally,
revenue from sleep therapy at existing locations declined $0.6 million primarily due to
an adjustment in our contractual allowance estimate in our sleep therapy business of
approximately $0.6 million; and
 
    
    the acquisition of somniTech, Inc. and somniCare, Inc. (collectively Somni)
in August 2009 and Avastra Eastern Sleep Centers, Inc. (Eastern) in September 2009
which resulted in an increase in net revenues of $1.6 million.
 Cost of sales and services
 Operating expenses
 Bad debt expense .
  20




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Impairment of fixed assets
 Net other expense
 Income from discontinued operations
 2010
    
    
    2009Revenues
    
    $
    21,763,674
    
    
    $
    22,202,609Income (loss) from operations, net of taxes
    
    $
    (39,783
    )
    
    $
    327,868Estimated (charges) incurred on sale of business
    
    
    (1,472,372
    )
    
    
    Income (loss) from discontinued operations, net of tax
    
    $
    (1,512,155
    )
    
    $
    327,868
  Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
  21




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##### Table of Contents



Discussion of Nine Month Periods Ended September 30, 2010 and 2009
 Net revenues
 
    
    a decrease in the revenues from existing sleep center locations of
approximately $1.3 million during the nine months ended September 30, 2010, compared
with the same period in 2009. The decline in revenues from sleep diagnostic services
at existing locations of $1.1 million is primarily due to lower volumes (approximately
$0.8 million) and lower revenue per sleeps study (approximately $0.3 million) compared
to the same period in 2009. The decline in therapy revenue of $0.2 million is due to
the adjustment in the reserve for contractual allowances in 2009 of approximately $0.6
million. The offsetting increase in therapy revenue was driven by increases in both
set-up and re-supply volumes, offset by lower average revenue per set-up compared to
the same period in 2009.; and
 
    
    the acquisition of somniTech, Inc. and somniCare, Inc. (collectively Somni)
in August 2009 and Avastra Eastern Sleep Centers, Inc. (Eastern) in September 2009
which resulted in an increase in net revenues of $7.3 million.
 Cost of sales and services
 Operating expenses
 Bad debt expense
 Impairment of fixed assets
 Net other expense
 Income from discontinued operations
 2010
    
    
    2009Revenues
    
    $
    65,599,725
    
    
    $
    66,643,918Income from operations, net of taxes
    
    $
    848,973
    
    
    $
    1,279,707Estimated (charges) incurred on sale of business
    
    
    (1,472,372
    )
    
    
    Income (loss) from discontinued operations, net of tax
    
    $
    (623,399
    )
    
    $
    1,279,707
  22




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Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
 Liquidity and Capital Resources
      23




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##### Table of Contents



Arvest Credit Facility
  Personal Guaranties.
  24




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##### Table of Contents



Maturity Dates.
 Tranche
    
    Amount
    
    
    Maturity Date#1
    
    $
    1,054,831
    
    
    
    6/1/2014#2
    
    
    5,217,241
    
    
    
    7/1/2014#3
    
    
    1,536,600
    
    
    
    7/1/2014#4
    
    
    1,490,739
    
    
    
    7/1/2014#5
    
    
    177,353
    
    
    
    12/1/2014#6
    
    
    4,920,171
    
    
    
    8/1/2015Total
    
    $
    14,396,935
 Interest Rate. The Wall
Street Journal
 Interest and Principal Payments.
   25




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##### Table of Contents



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.
  Compliance with Debt Service Coverage Ratio.
 Default and Remedies.
 Deposit Account Control Agreement.
  26




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##### Table of Contents



Financial Commitments
   < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years
    
    
    TotalLong-term debt
    
    $
    1,894,904
    
    
    $
    7,065,352
    
    
    $
    14,249,540
    
    
    $
    3,186,189
    
    
    $
    26,395,985Operating leases
    
    
    1,396,597
    
    
    
    2,136,669
    
    
    
    1,282,201
    
    
    
    2,488,330
    
    
    
    7,303,797Long-term debt, discontinued operations
    
    
    2,724,633
    
    
    
    8,012,397
    
    
    
    17,138,238
    
    
    
    
    
    
    
    27,875,268Operating leases, discontinued operations
    
    
    766,291
    
    
    
    829,508
    
    
    
    468,950
    
    
    
    549,350
    
    
    
    2,614,099$
    6,782,425
    
    
    $
    18,043,926
    
    
    $
    33,138,929
    
    
    $
    6,223,869
    
    
    $
    64,189,149
  CRITICAL ACCOUNTING POLICIES
  Revenue recognition
   27




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Cost of Services and Sales
  28




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##### Table of Contents



Accounts Receivable
      September 30, 2010
    
    
    December 31, 2009Actual
    
    
    Expected
    
    
    Actual
    
    
    ExpectedSleep diagnostic business
    
    
    49.66
    
    
    
    50 to 55
    
    
    
    51.34
    
    
    
    50 to 55Sleep therapy business
    
    
    61.93
    
    
    
    55 to 60
    
    
    
    99.76
    
    
    
    100 to 105
  29




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##### Table of Contents



Goodwill and Intangible Assets
  Change in Accounting Method
  Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
    30




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Issued Guidance
   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.
   31




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Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4.
    
    Controls and Procedures and Item 4T. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
   
 Item 1A.
    
    Risk Factors.
   32




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##### Table of Contents



We have a bank credit facility of approximately $45 million and we may not achieve compliance with
the Debt Service Coverage Ratio requirements which begin December 31, 2010 or subject to certain
conditions, March 31, 2011.
    We need to obtain additional financing to fund our ongoing working capital needs.
   33




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##### Table of Contents



We require a significant amount of cash flow from operations and third-party financing to pay our
indebtedness, to execute our business plan and to fund our other liquidity needs.
    
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
 Unregistered Sales of Equity Securities
  Repurchases of Equity Securities
  
 Item 3.
    
    Defaults Upon Senior Securities.
  
 Item 4.
    
    (Removed and Reserved).
 
 Item 5.
    
    Other Information.
 Appointment of Chief Financial Officer
   34




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Arvest Bank
   35




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##### Table of Contents



Item 6.
    
    Exhibits.
  Exhibit No.
    
    Description10.1
    
    
    Asset Purchase Agreement dated September 1, 2010 among Walgreen Co.,
ApothecaryRx, LLC, and, to certain sections only, Graymark Healthcare, Inc.
(Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K filed on September 2, 2010).10.2
    
    
    First Amendment to Asset Purchase Agreement dated October 29, 2010 among
Walgreen Co., ApothecaryRx, LLC, and, to certain sections only, Graymark Healthcare,
Inc. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed on October 29, 2010).10.3
    
    
    Employment Agreement between the Registrant and Edward M. Carriero, Jr., dated
October 5, 2010 (filed herewith).10.4
    
    
    Amended and Restated Employment Agreement between the Registrant and Grant
Christianson, dated October 19, 2010 (filed herewith).31.1
    
    
    Certification of Stanton Nelson, Chief Executive Officer of Registrant
(furnished herewith).31.2
    
    
    Certification of Edward M. Carriero, Jr., Chief Financial Officer of Registrant
(furnished herewith).31.3
    
    
    Certification of Grant A. Christianson, Chief Accounting Officer of Registrant
(furnished herewith).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 (furnished herewith).32.2
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Edward M. Carriero, Jr., Chief Financial
Officer of Registrant (furnished herewith).32.3
    
    
    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 Accounting
Officer of Registrant (furnished herewith).
  36




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SIGNATURES
  GRAYMARK HEALTHCARE, INC.
(Registrant)By:
    /S/      STANTON NELSONStanton NelsonChief Executive Officer
(Principal Executive Officer)  By:
    /S/      EDWARD M. CARRIERO, JR.Edward M. Carriero, Jr.Chief Financial Officer
(Principal Financial Officer)  By:
    /S/      GRANT A. CHRISTIANSONGrant A. ChristiansonChief Accounting Officer
(Principal Accounting Officer)   37