##### 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, 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
(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 Yes o No
  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
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures and Item 4T. Controls and Procedures
    
    
    30Part II. Other InformationItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. (Removed and Reserved)
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    33Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 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 31,2010
    
    
    2009ASSETSCash and cash equivalents
    
    $
    1,285,574
    
    
    $
    1,890,606Accounts receivable, net of allowance for contractual adjustments and
doubtful accounts of $7,250,235 and $9,959,027, respectively
    
    
    10,615,365
    
    
    
    11,479,366Inventories
    
    
    8,674,472
    
    
    
    8,234,302Other current assets
    
    
    1,658,607
    
    
    
    743,266Total current assets
    
    
    22,234,018
    
    
    
    22,347,540Property and equipment, net
    
    
    5,775,551
    
    
    
    6,311,161Intangible assets, net
    
    
    12,375,659
    
    
    
    12,877,282Goodwill
    
    
    33,606,032
    
    
    
    33,606,032Other assets
    
    
    435,563
    
    
    
    725,262Total assets
    
    $
    74,426,823
    
    
    $
    75,867,277LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    5,302,542
    
    
    $
    3,649,422Accrued liabilities
    
    
    4,351,082
    
    
    
    4,552,647Short-term debt
    
    
    20,130
    
    
    
    195,816Current portion of long-term debt
    
    
    1,658,864
    
    
    
    2,263,499Total current liabilities
    
    
    11,332,618
    
    
    
    10,661,384Long-term debt, net of current portion
    
    
    45,269,551
    
    
    
    45,910,194Total liabilities
    
    
    56,602,169
    
    
    
    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;
28,984,319 and 28,989,145 issued and outstanding at June 30, 2010
and December 31, 2009, respectively
    
    
    2,898
    
    
    
    2,899Paid-in capital
    
    
    29,435,189
    
    
    
    29,086,750Accumulated deficit
    
    
    (11,647,227
    )
    
    
    (9,869,471
    )Total Graymark Healthcare shareholders equity
    
    
    17,790,860
    
    
    
    19,220,178Noncontrolling interest
    
    
    33,794
    
    
    
    75,521Total equity
    
    
    17,824,654
    
    
    
    19,295,699Total liabilities and shareholders equity
    
    $
    74,426,823
    
    
    $
    75,867,277
   2




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
For the Three Months Ended June 30, 2010 and 2009
(Unaudited)
 2010
    
    
    2009Net Revenues:Product sales
    
    $
    23,559,280
    
    
    $
    22,847,513Services
    
    
    4,694,398
    
    
    
    2,438,11428,253,678
    
    
    
    25,285,627Costs and Expenses:Cost of sales
    
    
    17,045,209
    
    
    
    17,103,196Cost of services
    
    
    1,404,384
    
    
    
    838,773Selling, general and administrative
    
    
    8,183,117
    
    
    
    6,669,736Bad debt expense
    
    
    562,227
    
    
    
    2,896,688Depreciation and amortization
    
    
    608,629
    
    
    
    528,60227,803,566
    
    
    
    28,036,995Other Income (Expense):Interest expense, net
    
    
    (598,321
    )
    
    
    (533,238
    )Income (loss) from continuing operations, before taxes
    
    
    (148,209
    )
    
    
    (3,284,606
    )Benefit (provision) for income taxes
    
    
    10,397
    
    
    
    208,000Income (loss) from continuing operations, net of taxes
    
    
    (137,812
    )
    
    
    (3,076,606
    )Discontinued operations, net of taxes
    
    
    4,576
    
    
    
    (15
    )Net income (loss)
    
    
    (133,236
    )
    
    
    (3,076,621
    )Less: Net income (loss) attributable to noncontrolling interests
    
    
    6,072
    
    
    
    (253,837
    )Net income (loss) attributable to Graymark Healthcare
    
    $
    (139,308
    )
    
    $
    (2,822,784
    )Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    0.00
    
    
    $
    (0.10
    )Discontinued operations attributable to Graymark Healthcare
common shareholders
    
    
    0.00
    
    
    
    0.00Net income (loss) attributable to Graymark Healthcare common
shareholders
    
    $
    0.00
    
    
    $
    (0.10
    )Average common shares outstanding (basic and diluted)
    
    
    28,984,319
    
    
    
    28,088,673
   3




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
 For the Six Months Ended June 30, 2010 and 2009
 (Unaudited)
 2010
    
    
    2009Net Revenues:Product sales
    
    $
    46,491,769
    
    
    $
    45,532,770Services
    
    
    9,367,383
    
    
    
    5,224,25055,859,152
    
    
    
    50,757,020Costs and Expenses:Cost of sales
    
    
    34,069,939
    
    
    
    33,831,283Cost of services
    
    
    2,856,984
    
    
    
    1,733,269Selling, general and administrative
    
    
    17,274,065
    
    
    
    13,467,491Bad debt expense
    
    
    815,221
    
    
    
    2,909,661Depreciation and amortization
    
    
    1,216,061
    
    
    
    1,044,68456,232,270
    
    
    
    52,986,388Other Income (Expense):Interest expense, net
    
    
    (1,192,852
    )
    
    
    (1,051,471
    )Income (loss) from continuing operations, before taxes
    
    
    (1,565,970
    )
    
    
    (3,280,839
    )Benefit (provision) for income taxes
    
    
    (37,589
    )
    
    
    208,000Income (loss) from continuing operations, net of taxes
    
    
    (1,603,559
    )
    
    
    (3,072,839
    )Discontinued operations, net of taxes
    
    
    4,576
    
    
    
    2,181Net income (loss)
    
    
    (1,598,983
    )
    
    
    (3,070,658
    )Less: Net income (loss) attributable to noncontrolling interests
    
    
    (34,727
    )
    
    
    (267,587
    )Net income (loss) attributable to Graymark Healthcare
    
    $
    (1,564,256
    )
    
    $
    (2,803,071
    )Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    (0.05
    )
    
    $
    (0.10
    )Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    0.00
    
    
    
    0.00Net income (loss) attributable to
Graymark Healthcare common shareholders
    
    $
    (0.05
    )
    
    $
    (0.10
    )Average common shares outstanding (basic and diluted)
    
    
    28,997,997
    
    
    
    28,096,019
   4




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Cash Flows
 For the Six Months Ended June 30, 2010 and 2009
 (Unaudited)
 2010
    
    
    2009Operating activities:Net income (loss)
    
    $
    (1,564,256
    )
    
    $
    (2,803,071
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,216,061
    
    
    
    1,044,684Noncontrolling interests
    
    
    (34,727
    )
    
    
    (267,587
    )Stock-based compensation, net of cashless vesting
    
    
    348,438
    
    
    
    185,796Bad debt expense
    
    
    815,221
    
    
    
    2,909,661Changes in assets and liabilities -Accounts receivable
    
    
    (164,720
    )
    
    
    1,221,772Inventories
    
    
    (440,170
    )
    
    
    381,337Other assets
    
    
    (625,642
    )
    
    
    (285,526
    )Accounts payable
    
    
    1,653,120
    
    
    
    (2,756,654
    )Accrued liabilities
    
    
    (201,565
    )
    
    
    (605,297
    )Net cash provided by (used in) operating activities
    
    
    1,001,760
    
    
    
    (974,885
    )Investing activities:Purchase of property and equipment
    
    
    (263,732
    )
    
    
    (796,616
    )Disposal of property and equipment
    
    
    84,904
    
    
    
    Net cash (used in) investing activities
    
    
    (178,828
    )
    
    
    (796,616
    )Financing activities:Debt proceeds
    
    
    12,614
    
    
    
    419,415Debt payments
    
    
    (1,433,578
    )
    
    
    (2,488,339
    )Distributions to noncontrolling interests, net of contributions
    
    
    (7,000
    )
    
    
    (33,146
    )Net cash (used in) financing activities
    
    
    (1,427,964
    )
    
    
    (2,102,070
    )Net change in cash and cash equivalents
    
    
    (605,032
    )
    
    
    (3,873,571
    )Cash and cash equivalents at beginning of period
    
    
    1,890,606
    
    
    
    15,380,310Cash and cash equivalents at end of period
    
    $
    1,285,574
    
    
    $
    11,506,739Cash Paid for Interest and Income Taxes:Interest expense
    
    $
    1,240,600
    
    
    $
    1,138,515Income taxes
    
    $
    32,270
    
    
    $
    38,900
   5




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GRAYMARK HEALTHCARE, INC.
 
 Notes to Consolidated Condensed Financial Statements
 For the Periods Ended June 30, 2010 and 2009
      Form 10-K
 Interim Financial Information
 Reclassifications
  6




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Consolidation
 Use of estimates
 Revenue recognition 
       7




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Restricted cash
 Accounts receivable
   June 30,
    
    
    December 31,2010
    
    
    2009Allowance for contractual adjustments
    
    $
    4,096,938
    
    
    $
    5,408,789Allowance for doubtful accounts
    
    
    3,153,297
    
    
    
    4,550,238Total
    
    $
    7,250,235
    
    
    $
    9,959,027
 Goodwill and Intangible Assets
  Discontinued Operations
 Earnings (loss) per share
 Fair value of financial instruments
  8




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Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
    Issued Guidance
    9




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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
  10




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Three Months
    
    
    Six MonthsEnding
    
    
    Ending6/30/2009
    
    
    6/30/2009Supplemental Pro Forma:Revenues
    
    $
    28,221,235
    
    
    $
    56,532,235Earnings
    
    $
    (2,492,450
    )
    
    $
    (2,241,450
    )Net income per common share
(basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.08
    )
    SMS
    
    
    ApothecaryRx
    
    
    TotalDecember 31, 2009
    
    $
    20,516,894
    
    
    $
    13,089,138
    
    
    $
    33,606,032June 30, 2010
    
    $
    20,516,894
    
    
    $
    13,089,138
    
    
    $
    33,606,032
   11




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Useful
    
    
    June 30, 2010
    
    
    December 31,Life
    
    
    Gross
    
    
    Accumulated
    
    
    
    
    
    
    2009(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    NetSMS:Customer relationships
    
    
    Indefinite
    
    
    $
    3,870,000
    
    
    $
    
    
    
    $
    3,870,000
    
    
    $
    3,870,000Customer relationships
    
    
    8  15
    
    
    
    1,450,000
    
    
    
    (175,584
    )
    
    
    1,274,416
    
    
    
    1,338,969Covenants not to compete
    
    
    3  15
    
    
    
    295,000
    
    
    
    (106,806
    )
    
    
    188,194
    
    
    
    218,475Trademark
    
    
    10  15
    
    
    
    271,000
    
    
    
    (25,361
    )
    
    
    245,639
    
    
    
    258,356Payor contracts
    
    
    15
    
    
    
    190,000
    
    
    
    (10,555
    )
    
    
    179,445
    
    
    
    185,778ApothecaryRx:Customer files
    
    
    5  15
    
    
    
    7,587,717
    
    
    
    (1,506,774
    )
    
    
    6,080,943
    
    
    
    6,340,838Covenants not to compete
    
    
    3  5
    
    
    
    1,514,065
    
    
    
    (977,043
    )
    
    
    537,022
    
    
    
    664,866Total
    
    
    
    
    
    $
    15,177,782
    
    
    $
    (2,802,123
    )
    
    $
    12,375,659
    
    
    $
    12,877,282
  Twelve months ended June 30,2011
    
    $
    994,0002012
    
    
    925,0002013
    
    
    768,0002014
    
    
    679,0002015
    
    
    669,000
   Maturity
    
    
    June 30,
    
    
    December 31,Rate (1)
    
    
    Date
    
    
    2010
    
    
    2009SMS:Senior 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  Sept. 2012
    
    
    330,319
    
    
    
    467,835Notes payable on equipment
    
    
    6  14%
    
    
    April 2012  Dec. 2013
    
    
    488,829
    
    
    
    570,947Notes payable on vehicles
    
    
    2.9  3.9%
    
    
    Nov. 2012  Dec. 2013
    
    
    75,702
    
    
    
    104,764Capital leases
    
    
    11.4%
    
    
    Nov. 2010
    
    
    39,927
    
    
    
    81,314Short-term insurance premium financing
    
    
    7.5%
    
    
    Sept. 2010
    
    
    20,130
    
    
    
    68,31622,553,623
    
    
    
    22,891,892ApothecaryRx:Senior bank debt
    
    
    6%
    
    
    May 2014
    
    
    17,403,625
    
    
    
    17,403,625Bank line of credit
    
    
    6%
    
    
    July 2014  Dec. 2014
    
    
    5,394,594
    
    
    
    5,394,594Seller financing
    
    
    4.13  7.25%
    
    
    July 2010  June 2011
    
    
    1,038,995
    
    
    
    2,015,495Non-compete agreements
    
    
    0.0  7.65%
    
    
    July 2012  Nov. 2013
    
    
    557,708
    
    
    
    663,90324,394,922
    
    
    
    25,477,617Total borrowings
    
    
    
    
    
    
    
    
    
    
    46,948,545
    
    
    
    48,369,509Less:Short-term debt
    
    
    
    
    
    
    
    
    
    
    (20,130
    )
    
    
    (195,816
    )Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    (1,658,864
    )
    
    
    (2,263,499
    )Long-term debt
    
    
    
    
    
    
    
    
    
    $
    45,269,551
    
    
    $
    45,910,194
 (1)
    
    Effective rate as of June 30, 2010  12




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Twelve months ended June 30,2011
    
    $
    1,659,0002012
    
    
    5,015,0002013
    
    
    5,830,0002014
    
    
    25,115,0002015
    
    
    6,150,000Thereafter
    
    
    3,159,000
   
    
    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.
   13




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14




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Three Months Ending
    
    
    Six Months EndingJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Sales to external customers:SMS
    
    $
    6,111,066
    
    
    $
    2,959,214
    
    
    $
    12,023,101
    
    
    $
    6,315,712ApothecaryRx
    
    
    22,142,612
    
    
    
    22,326,413
    
    
    
    43,836,051
    
    
    
    44,441,308Total
    
    $
    28,253,678
    
    
    $
    25,285,627
    
    
    $
    55,859,152
    
    
    $
    50,757,020Segment operating profit (loss):SMS
    
    $
    (14,498
    )
    
    $
    (3,375,129
    )
    
    $
    (456,520
    )
    
    $
    (3,385,593
    )ApothecaryRx
    
    
    599,021
    
    
    
    469,343
    
    
    
    884,180
    
    
    
    949,658Other
    
    
    (732,732
    )
    
    
    (378,820
    )
    
    
    (1,993,630
    )
    
    
    (844,904
    )Total
    
    $
    (148,209
    )
    
    $
    (3,284,606
    )
    
    $
    (1,565,970
    )
    
    $
    (3,280,839
    )June 30,
    
    
    December 31,2010
    
    
    2009Segment assets:SMS
    
    $
    36,085,396
    
    
    $
    36,863,976ApothecaryRx
    
    
    37,266,778
    
    
    
    37,399,351Discontinued operations
    
    
    12,229
    
    
    
    120,150Other
    
    
    1,062,420
    
    
    
    1,483,800Total
    
    $
    74,426,823
    
    
    $
    75,867,277
       15




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
    SMS Operating Segment
   
    
    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.
  16




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##### Table of Contents



ApothecaryRx Operating Segment
  Results of Operations
  Comparison of the Three and Six Month Periods Ended June 30, 2010 and 2009
 Consolidated Totals
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    28,253,678
    
    
    $
    25,285,627
    
    
    $
    55,859,152
    
    
    $
    50,757,020Cost of sales and services
    
    
    18,449,593
    
    
    
    17,941,969
    
    
    
    36,926,923
    
    
    
    35,564,552Operating expenses
    
    
    8,791,746
    
    
    
    7,198,338
    
    
    
    18,490,126
    
    
    
    14,512,175Bad debt expense
    
    
    562,227
    
    
    
    2,896,688
    
    
    
    815,221
    
    
    
    2,909,661Net other income (expense)
    
    
    (598,321
    )
    
    
    (533,238
    )
    
    
    (1,192,852
    )
    
    
    (1,051,471
    )Income (loss) from continuing
operations, before taxes
    
    
    (148,209
    )
    
    
    (3,284,606
    )
    
    
    (1,565,970
    )
    
    
    (3,280,839
    )Benefit (provision) for income taxes
    
    
    10,397
    
    
    
    208,000
    
    
    
    (37,589
    )
    
    
    208,000Income (loss) from continuing
operations, net of taxes
    
    
    (137,812
    )
    
    
    (3,076,606
    )
    
    
    (1,603,559
    )
    
    
    (3,072,839
    )Discontinued operations, net of taxes
    
    
    4,576
    
    
    
    (15
    )
    
    
    4,576
    
    
    
    2,181Net income (loss)
    
    
    (133,236
    )
    
    
    (3,076,621
    )
    
    
    (1,598,983
    )
    
    
    (3,070,658
    )Noncontrolling interests
    
    
    (6,072
    )
    
    
    253,837
    
    
    
    34,727
    
    
    
    267,587Net income (loss) attributable to
Graymark Healthcare
    
    $
    (139,308
    )
    
    $
    (2,822,784
    )
    
    $
    (1,564,256
    )
    
    $
    (2,803,071
    )
  17




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##### Table of Contents



Discussion of Three Month Periods Ended June 30, 2010 and 2009
 Net revenues
 
    
    an increase in the revenues in our existing sleep center locations of
approximately $0.3 million,
 
    
    the acquisitions of our SMS operating segment in August and September 2009 that
resulted in an increase in revenue of $2.9 million, and
 
    
    same store pharmacy revenues decreased approximately $0.2 million. See the
Segment Analysis below, for additional information.
 Cost of sales and services
 
    
    a decrease in the cost of sales at existing sleep center locations of
approximately $0.2 million,
 
    
    the acquisitions of our SMS operating segment in August and September 2009
which resulted in an increase in cost of sales of $0.8 million, and
 
    
    same store pharmacy cost of sales decreased approximately $0.1 million. See
the Segment Analysis below, for additional information.
 Operating expenses
 Bad debt expense .
 Net other expense
 Income from discontinued operations
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##### Table of Contents



Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
 Discussion of Six Month Periods Ended June 30, 2010 and 2009
 Net revenues
 
    
    revenues in our existing sleep center locations were flat,
 
    
    the acquisitions of our SMS operating segment in August and September 2009 that
resulted in an increase in revenue of $5.7 million, and
 
    
    same store pharmacy revenues decreased approximately $0.6 million. See the
Segment Analysis below, for additional information.
 Cost of sales and services
 
    
    a decrease in the cost of sales at existing sleep center locations of
approximately $0.2 million,
 
    
    the acquisitions of our SMS operating segment in August and September 2009
which resulted in an increase in cost of sales of $1.7 million, and
 
    
    a decrease in same store pharmacy cost of sales of approximately $0.1 million.
See the Segment Analysis below, for additional information.
 Operating expenses
 Bad debt expense
 Net other expense
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##### Table of Contents



Income from discontinued operations
 Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
 SMS Operating Segment
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    6,111,066
    
    
    $
    2,959,214
    
    
    $
    12,023,101
    
    
    $
    6,315,712Cost of sales and services
    
    
    1,699,215
    
    
    
    1,035,935
    
    
    
    3,552,150
    
    
    
    2,039,338Operating expenses
    
    
    3,597,892
    
    
    
    2,193,235
    
    
    
    7,574,516
    
    
    
    4,332,263Bad debt expense
    
    
    541,994
    
    
    
    2,884,005
    
    
    
    780,893
    
    
    
    2,884,151Net other income (expense)
    
    
    (286,463
    )
    
    
    (221,118
    )
    
    
    (572,062
    )
    
    
    (445,553
    )Income (loss) from continuing operations,
before taxes and noncontrolling interests
    
    
    (14,498
    )
    
    
    (3,375,129
    )
    
    
    (456,520
    )
    
    
    (3,385,593
    )Noncontrolling interests
    
    
    (6,072
    )
    
    
    253,837
    
    
    
    34,727
    
    
    
    267,587Income (loss) from continuing operations,
before taxes
    
    $
    (20,570
    )
    
    $
    (3,121,292
    )
    
    $
    (421,793
    )
    
    $
    (3,118,006
    )
 Discussion of Three Month Periods Ended June 30, 2010 and 2009
 Net revenues
 
    
    an increase in the revenues from existing sleep center locations of
approximately $0.3 million during the second quarter of 2010, compared with the same
period in 2009. A decline in revenues from sleep diagnostic services at existing
locations of $0.1 million was offset by a $0.4 million increase in revenues from sleep
therapy business at existing locations; 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 $2.9 million.
 Cost of sales and services
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Operating expenses
 Bad debt expense
 Net other expense
 Noncontrolling interests
 Income (loss) from continuing operations, before taxes.
 Discussion of Six Month Periods Ended June 30, 2010 and 2009
 Net revenues
 
    
    a decrease in the revenues from existing sleep diagnostic business of
approximately $0.4 million during the first six months of 2010, compared with the same
period in 2009;
 
    
    an increase in revenues from sleep therapy business at existing locations of
approximately $0.4 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 $5.7 million.
 Cost of sales and services
 Operating expenses
 Bad debt expense
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Net other expense
 Noncontrolling interests
 Income (loss) from continuing operations, before taxes.
 ApothecaryRx Operating Segment
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    22,142,612
    
    
    $
    22,326,413
    
    
    $
    43,836,051
    
    
    $
    44,441,308Cost of sales
    
    
    16,750,378
    
    
    
    16,906,034
    
    
    
    33,374,773
    
    
    
    33,525,214Operating expenses
    
    
    4,481,347
    
    
    
    4,590,353
    
    
    
    8,954,932
    
    
    
    9,254,897Net other income (expense)
    
    
    (311,866
    )
    
    
    (360,683
    )
    
    
    (622,166
    )
    
    
    (711,539
    )Income from continuing operations,
before taxes
    
    $
    599,021
    
    
    $
    469,343
    
    
    $
    884,180
    
    
    $
    949,658
 Discussion of Three Month Periods Ended June 30, 2010 and 2009
 Net revenues
 Cost of sales
 Operating expenses
 Net other expense
 Income from continuing operations, before taxes.
  22




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Discussion of Six Month Periods Ended June 30, 2010 and 2009
 Net revenues
 Cost of sales
 Operating expenses
 Net other expense
 Income from continuing operations, before taxes.
 Liquidity and Capital Resources
       23




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Arvest Credit Facility
  Personal Guaranties.
 
    
    1.50-to-1 for four consecutive calendar quarters the guaranteed amount will be
reduced to $10 million;
 
    
    1.75-to-1 for four consecutive calendar quarters the guaranteed amount will be
reduced to $5 million;
 
    
    2.00-to-1 for four consecutive calendar quarters the guaranties will be
released.
  
    
    that our net income (i) increased (to the extent deducted in determining net
income) by the sum, without duplication, of all interest expense, amortization,
depreciation, and non-recurring expenses as approved by Arvest Bank, and (ii) decreased
(to the extent included in determining net income and without duplication) by the
amount of minority interest share of net income and distributions to minority interests
for taxes, if any, to
 
    
    annual debt service including interest expense and current maturities of
indebtedness.
    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.
  Use of Proceeds.
   25




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##### Table of Contents



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.
 Deposit Account Control Agreement.
 Compliance with Debt Service Coverage Ratio.
 Financial Commitments
   26




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##### Table of Contents



< 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years
    
    
    TotalShort-term debt
    
    $
    20,130
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,130Long-term debt
    
    
    3,972,620
    
    
    
    15,071,879
    
    
    
    33,117,478
    
    
    
    3,189,189
    
    
    
    55,351,166Operating leases
    
    
    2,291,808
    
    
    
    2,998,434
    
    
    
    1,698,238
    
    
    
    3,157,659
    
    
    
    10,146,139$
    6,284,558
    
    
    $
    18,070,313
    
    
    $
    34,815,716
    
    
    $
    6,346,848
    
    
    $
    65,517,435
 CRITICAL ACCOUNTING POLICIES
  Revenue recognition
      27




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##### Table of Contents



Accounts Receivable
  Goodwill and Intangible Assets
  Change in Accounting Method
   28




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Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
    Issued Guidance
    29




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##### Table of Contents



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.
 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.
   30




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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 September 30, 2010.
    We may need to obtain additional financing to fund our ongoing working capital needs.
   31




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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.
   32




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##### Table of Contents



Item 6.
    
    Exhibits.
  Exhibit No.
    
    Description31.1
    
    
    Certification of Stanton Nelson, Chief Executive Officer of Registrant.
(furnished herewith)31.2
    
    
    Certification of Grant A. Christianson, Chief Financial Officer and 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 Grant A. Christianson, Chief Financial
Officer and Chief Accounting Officer of Registrant. (furnished herewith)
 
 SIGNATURES
  GRAYMARK HEALTHCARE, INC.
(Registrant)By:
    /s/ STANTON NELSONStanton NelsonChief Executive Officer

(Principal Executive Officer)Date:  August 13, 2010By:
    /s/ GRANT A. CHRISTIANSONGrant A. ChristiansonChief Financial Officer and
Chief Accounting Officer
(Principal Financial and Accounting Officer)   33