##### 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, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
 Commission File Number: 001-34171
 GRAYMARK HEALTHCARE, INC.
  OKLAHOMA
(State or other jurisdiction of 
incorporation or organization)
    
    20-0180812
(I.R.S. Employer
Identification No.)
 210 Park Avenue, Ste. 1350
Oklahoma City, Oklahoma 73102   (405) 601-5300
 
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 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
    
    
    36Item 4. Controls and Procedures and Item 4T. Controls and Procedures
    
    
    36Part II. Other InformationItem 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    39SIGNATURES
    
    
    40EX-31.1EX-31.2EX-32.1EX-32.2
     -i-




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




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Balance Sheets
(Unaudited)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    4,285,402
    
    
    $
    15,380,310Accounts receivable, net of allowance for contractual adjustments and
doubtful accounts of $11,979,249 and $13,142,913, respectively
    
    
    11,259,007
    
    
    
    13,312,157Inventories
    
    
    8,633,179
    
    
    
    8,893,918Other current assets
    
    
    657,706
    
    
    
    298,239Total current assets
    
    
    24,835,294
    
    
    
    37,884,624Property and equipment, net
    
    
    6,252,446
    
    
    
    5,014,176Intangible assets, net
    
    
    7,701,898
    
    
    
    8,396,238Goodwill
    
    
    38,283,241
    
    
    
    29,694,923Other assets
    
    
    934,438
    
    
    
    343,669Total assets
    
    $
    78,007,317
    
    
    $
    81,333,630LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    3,578,947
    
    
    $
    6,111,783Accrued liabilities
    
    
    4,546,527
    
    
    
    4,951,562Short-term debt
    
    
    127,500
    
    
    
    565,190Current portion of long-term debt
    
    
    3,044,888
    
    
    
    3,913,481Total current liabilities
    
    
    11,297,862
    
    
    
    15,542,016Long-term debt, net of current portion
    
    
    46,334,877
    
    
    
    43,248,053Total liabilities
    
    
    57,632,739
    
    
    
    58,790,069Equity:Graymark Healthcare shareholders equity:Preferred stock $0.0001 par value, 10,000,000
authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock $0.0001 par value, 500,000,000 shares
authorized; 28,756,693 and 27,719,113 issued and outstanding
at September 30, 2009 and December 31, 2008, respectively
    
    
    2,876
    
    
    
    2,772Paid-in capital
    
    
    29,175,377
    
    
    
    27,130,136Accumulated deficit
    
    
    (8,327,137
    )
    
    
    (4,681,575
    )Deferred compensation  restricted stock
    
    
    (507,256
    )
    
    
    (192,400
    )Total Graymark Healthcare shareholders equity
    
    
    20,343,860
    
    
    
    22,258,933Noncontrolling interest
    
    
    30,718
    
    
    
    284,628Total equity
    
    
    20,374,578
    
    
    
    22,543,561Total liabilities and shareholders equity
    
    $
    78,007,317
    
    
    $
    81,333,630
  -2-




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GRAYMARK HEALTHCARE, INC.
  Consolidated Condensed Statements of Operations
For the Three Months Ended September 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Net Revenues:Product sales
    
    $
    23,869,407
    
    
    $
    23,510,086Services
    
    
    3,467,377
    
    
    
    3,947,03027,336,784
    
    
    
    27,457,116Costs and Expenses:Cost of sales
    
    
    17,343,311
    
    
    
    17,383,849Cost of services
    
    
    1,580,995
    
    
    
    1,553,107Selling, general and administrative
    
    
    8,047,116
    
    
    
    6,816,212Depreciation and amortization
    
    
    557,243
    
    
    
    424,98027,528,665
    
    
    
    26,178,148Other Income (Expense):Interest expense, net
    
    
    (625,416
    )
    
    
    (576,244
    )Income (loss) from continuing operations, before taxes
    
    
    (817,297
    )
    
    
    702,724Benefit (provision) for income taxes
    
    
    
    
    
    
    (277,901
    )Income (loss) from continuing operations, net of taxes
    
    
    (817,297
    )
    
    
    424,823Discontinued operations, net of taxes
    
    
    624
    
    
    
    87,696Net income (loss)
    
    
    (816,673
    )
    
    
    512,519Less: Net income (loss) attributable to noncontrolling interests
    
    
    25,819
    
    
    
    (28,595
    )Net income (loss) attributable to Graymark Healthcare
    
    $
    (842,492
    )
    
    $
    541,114Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    (0.03
    )
    
    $
    0.02Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    0.00
    
    
    
    0.00Net income (loss) attributable to
Graymark Healthcare common shareholders
    
    $
    (0.03
    )
    
    $
    0.02Average common shares outstanding
    
    
    28,155,573
    
    
    
    27,508,924Dilutive effect of stock warrants and options
    
    
    
    
    
    
    452,000Average common shares outstanding assuming dilution
    
    
    28,155,573
    
    
    
    27,960,024
  -3-




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GRAYMARK HEALTHCARE, INC.
  Consolidated Condensed Statements of Operations
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Net Revenues:Product sales
    
    $
    69,402,179
    
    
    $
    60,167,242Services
    
    
    8,691,627
    
    
    
    9,445,34078,093,806
    
    
    
    69,612,582Costs and Expenses:Cost of sales
    
    
    51,519,330
    
    
    
    44,822,711Cost of services
    
    
    4,063,305
    
    
    
    3,716,269Selling, general and administrative
    
    
    20,682,283
    
    
    
    16,014,187Change in accounting estimate
    
    
    2,648,207
    
    
    
    Depreciation and amortization
    
    
    1,601,928
    
    
    
    1,092,67880,515,053
    
    
    
    65,645,845Other Income (Expense):Interest expense, net
    
    
    (1,676,888
    )
    
    
    (1,602,338
    )Income (loss) from continuing operations, before taxes
    
    
    (4,098,135
    )
    
    
    2,364,399Benefit (provision) for income taxes
    
    
    208,000
    
    
    
    (598,164
    )Income (loss) from continuing operations, net of taxes
    
    
    (3,890,135
    )
    
    
    1,766,235Discontinued operations, net of taxes
    
    
    2,805
    
    
    
    118,717Net income (loss)
    
    
    (3,887,330
    )
    
    
    1,884,952Less: Net income (loss) attributable to noncontrolling interests
    
    
    (241,768
    )
    
    
    590,282Net income (loss) attributable to Graymark Healthcare
    
    $
    (3,645,562
    )
    
    $
    1,294,670Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    (0.13
    )
    
    $
    0.05Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    0.00
    
    
    
    0.00Net income (loss) attributable to
Graymark Healthcare common shareholders
    
    $
    (0.13
    )
    
    $
    0.05Average common shares outstanding
    
    
    28,116,089
    
    
    
    25,310,579Dilutive effect of stock warrants and options
    
    
    
    
    
    
    452,000Average common shares outstanding assuming dilution
    
    
    28,116,089
    
    
    
    25,762,579
  -4-




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GRAYMARK HEALTHCARE, INC.
  Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    (3,645,562
    )
    
    $
    1,294,670Adjustments to reconcile net income (loss) to
net cash used in operating activities:Depreciation and amortization
    
    
    1,601,928
    
    
    
    1,092,678Noncontrolling interests
    
    
    (241,768
    )
    
    
    590,282Noncontrolling interests in discontinued operations
    
    
    
    
    
    
    97,653Stock-based compensation
    
    
    269,377
    
    
    
    231,000Excess tax benefits on stock-based compensation
    
    
    (82,888
    )
    
    
    Changes in assets and liabilities, net of acquisitions Accounts receivable
    
    
    4,034,503
    
    
    
    (6,374,366
    )Inventories
    
    
    339,097
    
    
    
    (688,506
    )Other assets
    
    
    (749,170
    )
    
    
    173,769Accounts payable
    
    
    (2,632,488
    )
    
    
    2,074,083Accrued liabilities
    
    
    (806,645
    )
    
    
    2,689,435Net cash provided by (used in) operating activities
    
    
    (1,913,616
    )
    
    
    1,180,698Investing activities:Cash received from acquisitions
    
    
    259,163
    
    
    
    3,000Purchase of businesses
    
    
    (9,056,000
    )
    
    
    (11,156,165
    )Purchase of property and equipment
    
    
    (928,387
    )
    
    
    (742,789
    )Net cash used in investing activities
    
    
    (9,725,224
    )
    
    
    (11,895,954
    )Financing activities:Issuance of common stock
    
    
    
    
    
    
    15,988,547Debt proceeds
    
    
    5,339,587
    
    
    
    13,334,539Debt payments
    
    
    (4,783,513
    )
    
    
    (2,882,636
    )Distributions to noncontrolling interests, net of contributions
    
    
    (12,142
    )
    
    
    (241,719
    )Net cash provided by financing activities
    
    
    543,932
    
    
    
    26,198,731Net change in cash and cash equivalents
    
    
    (11,094,908
    )
    
    
    15,483,475Cash and cash equivalents at beginning of period
    
    
    15,380,310
    
    
    
    2,072,866Cash and cash equivalents at end of period
    
    $
    4,285,402
    
    
    $
    17,556,341Noncash Investing and Financing Activities:Seller-financing of acquisitions
    
    $
    
    
    
    $
    4,228,000Common stock issued to pay-off convertible debt
    
    $
    
    
    
    $
    750,000Common stock and stock options issued to purchase business
    
    $
    1,544,000
    
    
    $
    960,000Common stock issued to purchase noncontrolling interests
    
    $
    
    
    
    $
    1,616,000Cash Paid for Interest and Income Taxes:Interest expense
    
    $
    1,747,000
    
    
    $
    1,392,000Income taxes
    
    $
    38,900
    
    
    $
    
  -5-




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




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Consolidation
 Use of estimates
 Revenue recognition
      Restricted cash
 -7-




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Accounts receivable
  Goodwill and Intangible Assets
  Discontinued Operations
 Fair value of financial instruments
 Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
  -8-




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Fair Value Accounting
    Business Combinations and Consolidation Accounting
  -9-




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Other
    -10-




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Issued Guidance
 e.g.
       -11-




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Somni
    
    
    EasternConsideration:Cash consideration
    
    $
    5,900,000
    
    
    $
    3,156,000Issuance of common stock
    
    
    
    
    
    
    1,544,000Total
    
    $
    5,900,000
    
    
    $
    4,700,000Cash and cash equivalents
    
    $
    225,774
    
    
    $
    33,389Accounts receivable
    
    
    1,176,233
    
    
    
    805,120Inventories
    
    
    78,358
    
    
    
    Other current assets
    
    
    6,268
    
    
    
    167,087Total current assets
    
    
    1,486,633
    
    
    
    1,005,596Property and equipment
    
    
    1,060,362
    
    
    
    157,109Goodwill
    
    
    4,930,761
    
    
    
    3,657,557Other assets
    
    
    27,711
    
    
    
    Total assets acquired
    
    
    7,505,467
    
    
    
    4,820,262Liabilities assumed:Current liabilities
    
    
    448,158
    
    
    
    53,104Short-term debt
    
    
    501,667
    
    
    
    Long-term debt
    
    
    655,642
    
    
    
    67,158Total liabilities assumed
    
    
    1,605,467
    
    
    
    120,262Net assets acquired
    
    $
    5,900,000
    
    
    $
    4,700,000
   -12-




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Revenues
    
    
    EarningsActual:Somni from 8/24/2009 to 9/30/2009
    
    $
    1,022,000
    
    
    $
    114,000Eastern from 9/14/2009 to 9/30/2009
    
    $
    100,000
    
    
    $
    21,000Supplemental Pro Forma:Nine months ending 9/30/2009
    
    $
    86,531,000
    
    
    $
    (2,354,000
    )Nine months ending 9/30/2008
    
    $
    79,063,000
    
    
    $
    2,956,000Earnings per common share (basic and diluted) from net
income (loss) attributable to Graymark Healthcare, Inc.:Nine months ending 9/30/2009
    
    
    
    
    
    $
    (0.08
    )Nine months ending 9/30/2008
    
    
    
    
    
    $
    0.11
    Apothecary
    
    
    SDC
    
    
    TotalDecember 31, 2008
    
    $
    13,089,138
    
    
    $
    16,605,785
    
    
    $
    29,694,923Business acquisitions
    
    
    
    
    
    
    8,588,318
    
    
    
    8,588,318September 30, 2009
    
    $
    13,089,138
    
    
    $
    25,194,103
    
    
    $
    38,283,241
  -13-




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Useful
    
    
    September 30, 2009
    
    
    December 31,Life
    
    
    Gross
    
    
    Accumulated
    
    
    
    
    
    2008(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    NetApothecary:Customer files
    
    
    15
    
    
    $
    7,587,717
    
    
    $
    (1,116,930
    )
    
    $
    6,470,787
    
    
    $
    6,862,955Covenants not to compete
    
    
    3  5
    
    
    
    1,514,065
    
    
    
    (778,732
    )
    
    
    735,333
    
    
    
    986,005SDC:Customer relationships
    
    
    15
    
    
    
    480,000
    
    
    
    (85,333
    )
    
    
    394,667
    
    
    
    418,666Covenants not to compete
    
    
    3
    
    
    
    50,000
    
    
    
    (4,444
    )
    
    
    45,556
    
    
    
    80,556Trademark
    
    
    15
    
    
    
    100,000
    
    
    
    (44,445
    )
    
    
    55,555
    
    
    
    48,056Total
    
    
    
    
    
    $
    9,731,782
    
    
    $
    (2,029,884
    )
    
    $
    7,701,898
    
    
    $
    8,396,238
  Year ended September 30,2010
    
    $
    851,0002011
    
    
    824,0002012
    
    
    736,0002013
    
    
    600,0002014
    
    
    537,000
   Maturity
    
    
    September 30,
    
    
    December 31,Rate (1)
    
    
    Date
    
    
    2009
    
    
    2008Apothecary:Senior bank debt
    
    
    5%
    
    
    May 2014
    
    $
    17,403,625
    
    
    $
    17,403,625Bank line of credit
    
    
    5%
    
    
    July 2014
    
    
    5,394,894
    
    
    
    5,394,894Seller financing
    
    
    4.13  7.25%
    
    
    July 2009  June 2011
    
    
    2,846,619
    
    
    
    5,164,611Non-compete agreements
    
    
    0.0  7.65%
    
    
    July 2009  Nov. 2013
    
    
    865,866
    
    
    
    1,110,10925,511,004
    
    
    
    29,073,239SDC:Senior bank debt
    
    
    5%
    
    
    May 2014
    
    
    12,596,375
    
    
    
    12,596,375Bank line of credit
    
    
    5%
    
    
    Aug. 2015
    
    
    9,002,341
    
    
    
    4,082,169Sleep center working capital notes payable
    
    
    4.75  8.75%
    
    
    Dec. 2009  July 2012
    
    
    434,463
    
    
    
    716,074Seller financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    490,078Note payable on equipment
    
    
    613%
    
    
    Aug. 2010  Dec. 2013
    
    
    607,484
    
    
    
    399,686Capital leases
    
    
    11%
    
    
    Nov. 2010  Dec. 2010
    
    
    101,546
    
    
    
    160,480Short-term debt and equipment leases
    
    
    4.25%
    
    
    July 2009  Jan. 2010
    
    
    127,500
    
    
    
    75,112Notes payable on vehicles
    
    
    2.9  7.75%
    
    
    Aug. 2010  Dec. 2013
    
    
    126,552
    
    
    
    133,51122,996,261
    
    
    
    18,653,485Total borrowings
    
    
    
    
    
    
    
    
    
    
    49,507,265
    
    
    
    47,726,724Less:Short-term debt
    
    
    
    
    
    
    
    
    
    
    (127,500
    )
    
    
    (565,190
    )Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    (3,044,888
    )
    
    
    (3,913,481
    )Long-term debt
    
    
    
    
    
    
    
    
    
    $
    46,334,877
    
    
    $
    43,248,053
  (1)
    
    Effective rate as of September 30, 2009 -14-




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Year ended September 30,2010
    
    $
    3,044,8882011
    
    
    2,189,2732012
    
    
    5,288,5312013
    
    
    5,974,7142014
    
    
    29,104,624Thereafter
    
    
    3,777,735
   
    
    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.
  -15-




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Year ended September 30,2010
    
    $
    3,211,0002011
    
    
    2,614,0002012
    
    
    1,940,0002013
    
    
    1,552,0002014
    
    
    1,028,000Thereafter
    
    
    1,993,000Total
    
    $
    12,338,000
    -16-




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##### Table of Contents



Three Months Ending
    
    
    Nine months EndingSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales to external customers:Apothecary
    
    $
    22,202,609
    
    
    $
    22,757,053
    
    
    $
    66,643,918
    
    
    $
    58,132,214SDC
    
    
    5,134,175
    
    
    
    4,700,063
    
    
    
    11,449,888
    
    
    
    11,480,368Total
    
    $
    27,336,784
    
    
    $
    27,457,116
    
    
    $
    78,093,806
    
    
    $
    69,612,582Segment operating profit (loss):Apothecary
    
    $
    327,244
    
    
    $
    189,156
    
    
    $
    1,208,030
    
    
    $
    375,790SDC
    
    
    (286,231
    )
    
    
    507,627
    
    
    
    (3,220,623
    )
    
    
    1,407,616Discontinued operations
    
    
    624
    
    
    
    87,696
    
    
    
    2,805
    
    
    
    118,717Other
    
    
    (884,129
    )
    
    
    (243,365
    )
    
    
    (1,635,774
    )
    
    
    (607,453
    )Total
    
    $
    (842,492
    )
    
    $
    541,114
    
    
    $
    (3,645,562
    )
    
    $
    1,294,670
 September 30,
    
    
    December 31,2009
    
    
    2008Segment assets:Apothecary
    
    $
    37,909,651
    
    
    $
    39,944,929SDC
    
    
    37,560,176
    
    
    
    28,743,861Discontinued operations
    
    
    120,047
    
    
    
    117,135Other
    
    
    2,417,443
    
    
    
    12,527,705Total
    
    $
    78,007,317
    
    
    $
    81,333,630
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    Apothecary Operating Segment
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SDC Operating Segment
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Acquisitions
  Impairment of Acquisition Goodwill
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
    
    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
  Comparison of the Three Month and Nine Month Periods Ended September 30, 2009 and 2008
 Consolidated Totals
 For the Three Months Ended
    
    
    For the Nine months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    27,336,784
    
    
    $
    27,457,116
    
    
    $
    78,093,806
    
    
    $
    69,612,582Cost of sales and services
    
    
    18,924,306
    
    
    
    18,936,956
    
    
    
    55,582,635
    
    
    
    48,538,980Operating expenses
    
    
    8,604,359
    
    
    
    7,241,192
    
    
    
    22,284,211
    
    
    
    17,106,865Change in accounting estimate
    
    
    
    
    
    
    
    
    
    
    2,648,207
    
    
    
    Net other income (expense)
    
    
    (625,416
    )
    
    
    (576,244
    )
    
    
    (1,676,888
    )
    
    
    (1,602,338
    )Income
(loss) from continuing operations, before taxes
    
    
    (817,297
    )
    
    
    702,724
    
    
    
    (4,098,135
    )
    
    
    2,364,399Benefit (provision) for income taxes
    
    
    
    
    
    
    (277,901
    )
    
    
    208,000
    
    
    
    (598,164
    )Income (loss) from continuing operations, net of taxes
    
    
    (817,297
    )
    
    
    424,823
    
    
    
    (3,890,135
    )
    
    
    1,766,235Discontinued operations, net of taxes
    
    
    624
    
    
    
    87,696
    
    
    
    2,805
    
    
    
    118,717Net income (loss)
    
    
    (816,673
    )
    
    
    512,519
    
    
    
    (3,887,330
    )
    
    
    1,884,952Noncontrolling interests
    
    
    (25,819
    )
    
    
    28,595
    
    
    
    241,768
    
    
    
    (590,282
    )Net income (loss) attributable to
Graymark Healthcare
    
    $
    (842,492
    )
    
    $
    541,114
    
    
    $
    (3,645,562
    )
    
    $
    1,294,670
 Discussion of Three Month Periods Ended September 30, 2009 and 2008
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Net revenues
 
    
    same store pharmacy revenues decreased approximately $0.5 million,
 
    
    a decrease in the revenues from existing sleep center locations of approximately $0.8
million,
 
    
    the company acquisitions of our SDC operating segment in August and September 2009 that
resulted in an increase in revenue of $1.1 million, and
 
    
    the opening of a sleep center in February 2009 that resulted in an increase in revenue of
$0.1 million. See the Segment Analysis below, for additional information.
 Cost of sales and services
 
    
    same store pharmacy cost of sales decreased $0.4 million,
 
    
    a decrease in the cost of sales at existing sleep center locations of approximately $0.1
million,
    
    the business acquisitions of our SDC operating segment in August and September 2009 which
resulted in an increase in cost of sales of $0.4 million, and
 
    
    the opening of a sleep center in February 2009 that resulted in an increase in cost of sales
of $0.1 million. See the Segment Analysis below, for additional information.
 Operating expenses
 Net other expense
 Income from discontinued operations
 Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
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Discussion of Nine Month Periods Ended September 30, 2009 and 2008
 Net revenues
 
    
    the seven acquisitions made by our Apothecary operating segment during 2008 that resulted in
an increase in revenue of $8.8 million,
 
    
    same store pharmacy revenues decreased approximately $0.3 million,
 
    
    a decrease in the revenues from existing sleep center locations of approximately $2.3
million,
 
    
    the acquisitions made by our SDC operating segment in August and September 2009 that resulted
in an increase in revenue of $1.1 million,
    
    the two business acquisitions made by our SDC operating segment in June 2008 that resulted in
an increase of revenue of $0.8 million related to those acquired operations in the 3rd quarter
of 2009, and
 
    
    the opening of two sleep centers in February 2009 and June 2008 that resulted in an increase
of $0.4 million. See the Segment Analysis below, for additional information.
 Cost of sales and services
 
    
    the seven pharmacy acquisitions made by our Apothecary operating segment during 2008 that
resulted in an increase in cost of sales and services of $6.3 million,
 
    
    same store pharmacy cost of sales decreased $0.4 million,
 
    
    the business acquisitions of our SDC operating segment in August and September 2009 that
resulted in an increase in cost of sales of $0.4 million,
 
    
    the two business acquisitions of our SDC operating segment in June 2008 that resulted in an
increase of cost of sales and services of $0.6 million,
 
    
    the opening of two sleep centers in February 2009 and June 2008 that resulted in an increase
of cost of sales and services of $0.3 million, and
 
    
    same sleep center cost of sales decreased $0.2 million. See the Segment Analysis below,
for additional information.
 Operating expenses
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Change in accounting estimate
 Net other expense
 Income from discontinued operations
 Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
 Apothecary Operating Segment
 For the Three Months Ended
    
    
    For the Nine months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    22,202,609
    
    
    $
    22,757,053
    
    
    $
    66,643,918
    
    
    $
    58,132,214Cost of sales
    
    
    16,896,063
    
    
    
    17,265,508
    
    
    
    50,421,278
    
    
    
    44,479,151Operating expenses
    
    
    4,630,334
    
    
    
    4,804,213
    
    
    
    13,885,230
    
    
    
    12,113,566Net other income (expense)
    
    
    (348,968
    )
    
    
    (382,242
    )
    
    
    (1,060,508
    )
    
    
    (972,556
    )Income from continuing operations,
before taxes
    
    $
    327,244
    
    
    $
    305,090
    
    
    $
    1,276,902
    
    
    $
    566,941
 Discussion of Three Month Periods Ended September 30, 2009 and 2008
 Net revenues
 Cost of sales
 Operating expenses
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Net other expense
 Income from continuing operations, before taxes.
 Discussion of Nine Month Periods Ended September 30, 2009 and 2008
 Net revenues
 Cost of sales
 Operating expenses
 Net other expense
 Income from continuing operations, before taxes.
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SDC Operating Segment
 For the Three Months Ended
    
    
    For the Nine months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    5,134,175
    
    
    $
    4,700,063
    
    
    $
    11,449,888
    
    
    $
    11,480,368Cost of sales and services
    
    
    2,028,243
    
    
    
    1,671,448
    
    
    
    5,161,357
    
    
    
    4,059,829Operating expenses
    
    
    3,054,934
    
    
    
    1,968,825
    
    
    
    6,529,366
    
    
    
    3,975,170Change in accounting estimate
    
    
    
    
    
    
    
    
    
    
    2,648,207
    
    
    
    Net other income (expense)
    
    
    (311,410
    )
    
    
    (269,632
    )
    
    
    (756,963
    )
    
    
    (731,469
    )Income (loss) from continuing operations,
before taxes and noncontrolling interests
    
    
    (260,412
    )
    
    
    790,158
    
    
    
    (3,646,005
    )
    
    
    2,713,900Noncontrolling interests
    
    
    (25,819
    )
    
    
    28,595
    
    
    
    241,768
    
    
    
    (590,282
    )Income (loss) from continuing operations,
before taxes
    
    $
    (286,231
    )
    
    $
    818,753
    
    
    $
    (3,404,237
    )
    
    $
    2,123,618
 Discussion of Three Month Periods Ended September 30, 2009 and 2008
 Net revenues
 
    
    a decrease in the revenues from existing sleep center locations of approximately $0.8 million
during the 3rd quarter of 2009, compared with the same period in 2008. The decline in
revenues at existing locations
was comprised of $0.6 million resulting from lower net realizable revenue per sleep study caused
by higher contractual allowances and $0.2 million resulting from a decrease in the number of
sleep studies performed;
 
    
    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 $1.1 million, and
 
    
    the opening of our Nocturna Sleep Center of Norman (Nocturna Norman) in February 2009 and
our Willow Bend Sleep Center (Willow Bend) in June 2008 which resulted in an increase of
$0.1 million.
  Cost of sales and services
  Operating expenses
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Net other expense
 Noncontrolling interests
 Income (loss) from continuing operations, before taxes
 Discussion of Nine Month Periods Ended September 30, 2009 and 2008
 Net revenues
 
    
    a decrease in the revenues from existing sleep center locations of approximately $2.3 million
during the 3rd quarter of 2009, compared with the same period in 2008. The decline in
revenues at existing locations was comprised of $1.2 million resulting from lower net
realizable revenue per sleep study caused by higher contractual allowances and $1.3 million
due to a decrease in the number of sleep studies performed;
 
    
    the acquisition of Somni in August 2009 and Eastern in September 2009 that resulted in an
increase in net revenues of approximately $1.1 million;
 
    
    the acquisition of Nocturna and the Texas Labs in June 2008 that resulted in an increase in
net revenues of approximately $0.8 million; and
 
    
    the opening of Nocturna Norman in February 2009 and Willow Bend in June 2008 that resulted in
an increase of $0.4 million.
  Cost of sales and services
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Operating expenses
 Change in accounting estimate
 Net other expense
 Noncontrolling interests
 Income (loss) from continuing operations, before taxes
 Liquidity and Capital Resources
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Arvest Credit Facility
  Personal Guaranties.
 
    
    1.50-to-1 for four consecutive calendar quarters the guaranteed amount will be reduced to $10 million;
    
    1.75-to-1 for four consecutive calendar quarters the guaranteed amount will be reduced to $5 million;
    
    2.00-to-1 for four consecutive calendar quarters the guaranties will be released.
  
    
    that our net income (i) increased (to the extent deducted in determining net income) by the sum, without duplication, of
all interest expense, amortization, depreciation, and non-recurring expenses as approved by Arvest Bank, and (ii) decreased
(to the extent included in determining net income and without duplication) by the amount of minority interest share of net
income and distributions to minority interests for taxes, if any, to
    
    annual debt service including interest expense and current maturities of indebtedness.
 -29-




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Maturity Dates.
 Interest Rate. The Wall
Street Journal
 Interest and Principal Payments.
  Use of Proceeds.
  -30-




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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.
 Financial Commitments
   < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years
    
    
    TotalShort-term debt
    
    $
    127,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    127,500Long-term debt
    
    
    5,087,083
    
    
    
    12,084,069
    
    
    
    38,042,259
    
    
    
    4,150,719
    
    
    
    59,364,130Operating leases
    
    
    3,210,555
    
    
    
    4,553,806
    
    
    
    2,579,559
    
    
    
    1,993,487
    
    
    
    12,337,407$
    8,425,138
    
    
    $
    16,637,875
    
    
    $
    40,621,818
    
    
    $
    6,144,206
    
    
    $
    71,829,037
 CRITICAL ACCOUNTING POLICIES
  -31-




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Revenue recognition
      Accounts Receivable
 -32-




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Goodwill and Intangible Assets
  Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
  Fair Value Accounting.
   -33-




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Business Combinations and Consolidation Accounting.
   -34-




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Other.
    Issued Guidance
   -35-




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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.
  -36-




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
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets,
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
  Accounts Receivable Reporting at SDC Holding
   -37-




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
    
    The passage of time.An additional nine months of history was available to be observed and
analyzed. That history reflected that certain accounts that were deemed collectible during
the fourth quarter 2008 review had not been collected.
    
    Increase in net accounts receivable.Accounts receivable at SDC Holdings, net of the
allowance for contractual adjustments and doubtful accounts, increased approximately $0.5
million from December 31, 2008 to June 30, 2009. This increase in net accounts receivable
happened at a time when sleep diagnostic volumes and revenues were declining indicating that
actual collection efforts were lagging behind the estimates used at December 31, 2008.
    
    Increase in risk assessment.The additional history and increase in net accounts receivable
caused management to increase its risk assessment of new accounts receivable.
  Management Controls over Financial Reporting at SDC Holdings
  -38-




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PART II. OTHER INFORMATION
  Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  
 Item 5.
    
    Other Information.
   Item 6.
    
    Exhibits
  Exhibit No.
    
    Description3.1.1
    
    
    Registrants Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 of Registrants Registration Statement on Form SB-2 (No.
333-111819) as filed with the Commission on January 2, 2004.3.2
    
    
    Registrants Bylaws, incorporated by reference to Exhibit 3.2 of Registrants
Registration Statement on Form SB-2 (No. 333-111819) as filed with the Commission on
January 9, 2004.4.1
    
    
    Form of Certificate of Common Stock of Registrant, incorporated by reference
to Exhibit 4.1 of Registrants Registration Statement on Form SB-2 (No. 333-111819) as
filed with the Commission on January 9, 2004.
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Exhibit No.
    
    Description4.2
    
    
    Stock Option Agreement between E. Peter Hoffman, Jr. and Registrant ,
incorporated by reference to Exhibit A of Exhibit 10.8 of Registrants Registration
Statement on Form SB-2 (No. 333-111819) as filed with the Commission on January 9,
2004.4.3
    
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-1 to
the Form of Senior Promissory Note dated August 5, 2005, incorporated by reference to
Exhibit 4.2 of Form 8-K filed with the Commission on August 11, 2005.4.4
    
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-2 to
the Form of Senior Promissory Note dated August 5, 2005, incorporated by reference to
Exhibit 4.3 of Form 8-K filed with the Commission on August 11, 2005.4.5
    
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-1 to
the Form of Senior Promissory Note dated October 24, 2005, incorporated by reference
to Exhibit 4.2 of Form 8-K filed with the Commission on November 1, 2005.4.6
    
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-2 to
the Form of Senior Promissory Note dated October 24, 2005, incorporated by reference
to Exhibit 4.3 of Form 8-K filed with the Commission on November 1, 2005.10.1
    
    
    Second Amendment to Loan Agreement between Registrant, SDC Holdings, LLC,
ApothecaryRx, LLC, Oliver Company Holdings, LLC, Roy T. Oliver, Stanton M. Nelson, Roy
T. Oliver as Trustee of the Roy T. Oliver Revocable Trust dated June 15, 2004, Vahid
Salalati, Greg Luster, Kevin Lewis, Roger Ely and Lewis P. Zeidner and Arvest Bank,
effective May 21, 2008, incorporated by reference to Form 10-Q
filed with the Commission on August 14, 2009.31.1
    
    
    Certification of Stanton Nelson, Chief Executive Officer of Registrant.31.2
    
    
    Certification of Grant A. Christianson, Chief Financial Officer and Controller
of Registrant.32.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Stanton Nelson, Chief Executive Officer of
Registrant.32.2
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Grant A. Christianson, Chief Financial
Officer and Controller of Registrant.
 
 SIGNATURES
  GRAYMARK HEALTHCARE, INC.
(Registrant)By:
    /S/STANTON NELSONStanton NelsonChief Executive Officer  By:
    /S/GRANT A. CHRISTIANSONGrant A. ChristiansonChief Financial Officer and Controller  -40-