**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2008**

 

| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period from              to              **

 

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**CommissionFile Number: 000-50638**

 

**GRAYMARKHEALTHCARE, INC.**

(Exact name of registrant asspecified in its charter)

 

| **OKLAHOMA**                     | ** ** | **20-0180812**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of | ** ** | (I.R.S. Employer    |
| incorporation or  organization)  | ** ** | Identification No.) |

 

| **101 N.  Robinson, Ste. 920**            |
|-------------------------------------------|
| **Oklahoma  City, Oklahoma 73102**        |
| (Address of principal  executive offices) |

 

| **(405)  601-5300**                                        |
|------------------------------------------------------------|
| (Registrant’s telephone  number, including area code) |

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

 

|   | Large  accelerated filer o |   | Accelerated  filer o         |
|--------|----------------------------|--------|-----------------------------------|
|   | Non-accelerated  filer o   |   | Smaller  reporting company x |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No x

 

As of May 6, 2008, 23,540,399 shares ofthe registrant’s common stock, $.0001 par value, were outstanding.

 

 

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**GRAYMARKHEALTHCARE, INC**.

FORM 10-Q

For the Quarter Ended March 31,2008

 

TABLE OF CONTENTS

 
| Part I.  | Financial Information                                                                       |   |
|---------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.       | Consolidated Condensed  Financial Statements (Unaudited)                                    | 1      |
|          | a) Balance Sheets                                                                           | 2      |
|          | b) Statements of Operations                                                                 | 3      |
|          | c) Statements of Cash Flows                                                                 | 4      |
|          | d) Notes to Financial Statements                                                            | 5      |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12     |
| Item 3.       | Quantitative  and Qualitative Disclosures about Market Risk                                 | 21     |
| Item 4.       | Controls  and Procedures and Item 4T. Controls and Procedures                               | 22     |
|          |                                                                                        |   |
| Part II. | Other  Information                                                                          |   |
| Item 1.       | Legal Proceedings                                                                           | 22     |
| Item 1A.      | Risk Factors                                                                                | 22     |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 22     |
| Item 3.       | Defaults  Upon Senior Securities                                                            | 23     |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                        | 23     |
| Item 5.       | Other Information                                                                           | 23     |
| Item 6.       | Exhibits                                                                                    | 23     |
|          |                                                                                        |   |
| SIGNATURES    | 25                                                                                          |

 

CAUTIONARY STATEMENTREGARDING FORWARD-LOOKING INFORMATION

 

Certain statements under thecaptions and “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and “Item 1A. Risk Factors,” andelsewhere in this report constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended.  Certain, but not necessarily all, of suchforward-looking statements can be identified by the use of forward-lookingterminology such as “anticipates,” “believes,” “expects,” “may,” “will,” or “should”or other variations thereon, or by discussions of strategies that involve risksand uncertainties.  Our actual results orindustry results may be materially different from any future results expressedor implied by such forward-looking statements. Factors that could cause actual results to differ materially includegeneral economic and business conditions; our ability to implement our businessstrategies; competition; availability of key personnel; increasing operatingcosts; unsuccessful promotional efforts; changes in brand awareness; acceptanceof new product offerings; and changes in, or the failure to comply with, andgovernment regulations.

 

Throughout this report thefirst personal plural pronoun in the nominative case form “we” and itsobjective case form “us”, its possessive and the intensive case forms “our” and“ourselves” and its reflexive form “ourselves” refer collectively to Graymark Healthcare, Inc. and itssubsidiaries, including SDC Holdings LLC and ApothecaryRx LLC, and theirexecutive officers and directors.

 

i

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**PART I.  FINANCIAL INFORMATION**

 

**Item1.  Graymark Healthcare, Inc.Consolidated Condensed Financial Statements**

 

The consolidated condensedfinancial statements included herein have been prepared by us pursuant to the rules andregulations of the Securities and Exchange Commission.  The Consolidated Condensed Balance Sheets asof March 31, 2008 and December 31, 2007, the Consolidated CondensedStatements of Operations for the three months ended March 31, 2008 and2007, and the Consolidated Condensed Statements of Cash Flows for the threemonths ended March 31, 2008 and 2007, have been prepared withoutaudit.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations,although the company believes that the disclosures are adequate to make the informationpresented not misleading.  It issuggested that these consolidated condensed financial statements be read inconjunction with the financial statements and the notes thereto included in ourlatest annual report on Form 10-K.

 

In the opinion management,the consolidated condensed statements for the unaudited interim periodspresented include all adjustments, consisting of normal recurring adjustments,necessary to present a fair statement of the results for such interim periods.  Because of the influence of seasonal andother factors on our operations, net earnings for any interim period may not becomparable to the same interim period in previous years, nor necessarilyindicative of earnings for the full year.

 

1

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**GRAYMARKHEALTHCARE, INC.**

 

**Consolidated Condensed Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                              |       |                     |       |                        |       |
| ASSETS                                                                                                                                                                            |       |                     |       |                        |       |
| ** **                                                                                                                                                                        |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                         |       | $                        | 2,094,002  |                        | $          | 2,072,866 |   |
| Accounts receivable, net of allowance for  sales adjustments and doubtful accounts of $6,104,923 and $5,946,788,  respectively                                                    |       | 8,420,600                |       | 6,485,267                   |       |
| Inventories                                                                                                                                                                       |       | 5,910,147                |       | 4,238,670                   |       |
| Other current assets                                                                                                                                                              |       | 255,550                  |       | 133,791                     |       |
| Total current assets                                                                                                                                                              |       | 16,680,299               |       | 12,930,594                  |       |
| Property and equipment, net                                                                                                                                                       |       | 2,158,288                |       | 2,069,685                   |       |
| Intangible assets, net                                                                                                                                                            |       | 7,692,444                |       | 5,609,326                   |       |
| Goodwill                                                                                                                                                                          |       | 22,331,732               |       | 20,247,905                  |       |
| Other assets                                                                                                                                                                      |       | 184,297                  |       | 275,127                     |       |
| Total assets                                                                                                                                                                      |       | $                        | 49,047,060 |                        | $          | 41,132,637 |   |
|                                                                                                                                                                              |       |                     |       |                        |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                                        |       |                     |       |                        |       |
|                                                                                                                                                                              |       |                     |       |                        |       |
| Liabilities:                                                                                                                                                                      |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                  |       | $                        | 4,068,905  |                        | $          | 4,423,324 |   |
| Accrued liabilities                                                                                                                                                               |       | 2,597,914                |       | 2,474,404                   |       |
| Short-term debt                                                                                                                                                                   |       | 18,009,988               |       | 13,993,015                  |       |
| Current portion of long-term debt                                                                                                                                                 |       | 3,156,645                |       | 2,394,512                   |       |
| Total current liabilities                                                                                                                                                         |       | 27,833,452               |       | 23,285,255                  |       |
| Long-term debt, net of current portion                                                                                                                                            |       | 16,396,680               |       | 15,354,584                  |       |
| Total liabilities                                                                                                                                                                 |       | 44,230,132               |       | 38,639,839                  |       |
| Minority interests                                                                                                                                                                |       | 880,091                  |       | 629,916                     |       |
| 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; 23,540,399 and 22,190,400 issued and outstanding at  March 31, 2008 and December 31, 2007, respectively |       | 2,354                    |       | 2,219                       |       |
| Paid-in capital                                                                                                                                                                   |       | 8,975,001                |       | 7,286,636                   |       |
| Accumulated deficit                                                                                                                                                               |       | (5,040,518               | )          | (5,425,973                  | )          |
| Total shareholders’ equity                                                                                                                                                   |       | 3,936,837                |       | 1,862,882                   |       |
| Total liabilities and shareholders’ equity                                                                                                                                   |       | $                        | 49,047,060 |                        | $          | 41,132,637 |   |

 

See Accompanying Notes toConsolidated Condensed Financial Statements

 

2

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**GRAYMARKHEALTHCARE, INC.**

 

**Consolidated Condensed Statements of Operations**

**For theThree Months Ended March 31, 2008 and 2007**

**(Unaudited)**

 
| ** **                                                           | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                 |       |       |       |       |       |
| Revenues:                                                            |       |       |       |       |       |
| Product sales                                                        |       | $          | 16,515,894 |       | $          | 7,316,644 |   |
| Services                                                             |       | 2,527,431  |       | 1,185,581  |       |
|                                                                 |       | 19,043,325 |       | 8,502,225  |       |
|                                                                 |       |       |       |       |       |
| Costs and Expenses:                                                  |       |       |       |       |       |
| Cost of sales                                                        |       | 12,302,924 |       | 5,474,401  |       |
| Cost of services                                                     |       | 971,712    |       | 398,768    |       |
| Selling, general and administrative                                  |       | 4,105,226  |       | 1,986,505  |       |
| Depreciation and amortization                                        |       | 306,987    |       | 129,038    |       |
|                                                                 |       | 17,686,849 |       | 7,988,712  |       |
|                                                                 |       |       |       |       |       |
| Income from continuing operations                                    |       | 1,356,476  |       | 513,513    |       |
| Other Income (Expense):                                              |       |       |       |       |       |
| Interest expense, net                                                |       | (527,179   | )          | (300,675   | )          |
| Net income before minority interests and  provision for income taxes |       | 829,297    |       | 212,838    |       |
| Minority interests                                                   |       | (364,885   | )          | (146,646   | )          |
| Net income before provision for income  taxes                        |       | 464,412    |       | 66,192     |       |
| Provision for income taxes                                           |       | (100,477   | )          | —     |       |
| Net income from continuing operations                                |       | 363,935    |       | 66,192     |       |
| Income from discontinued operations                                  |       | 21,520     |       | —     |       |
| Net income                                                           |       | $          | 385,455    |       | 66,192     |   |
| Net earnings per common share (basic and  diluted):                  |       |       |       |       |       |
| Net income from continuing operations                                |       | $          | 0.02       |       | $          | 0.00 |   |
| Income from discontinued operations                                  |       | 0.00       |       | 0.00       |       |
| Net earnings per share                                               |       | $          | 0.02       |       | $          | 0.00 |   |
| Average common shares outstanding                                    |       | 23,375,399 |       | 20,400,000 |       |
| Dilutive effect of stock warrants                                    |       | 202,500    |       | —     |       |
| Average common shares outstanding assuming  dilution                 |       | 23,577,899 |       | 20,400,000 |       |

 

See Accompanying Notes toConsolidated Condensed Financial Statements

 

3

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**GRAYMARKHEALTHCARE, INC.**

 

**Consolidated Condensed Statements of Cash Flows**

**For theThree Months Ended March 31, 2008 and 2007**

**(Unaudited)**

** **
| ** **                                                                                   | ** ** | **2008**   | ** ** | **2007**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|
|                                                                                         |       |       |       |        |       |
| Operating activities:                                                                        |       |       |       |        |       |
| Net income                                                                                   |       | $          | 385,455    |        | $          | 66,192 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |       |       |        |       |
| Depreciation and amortization                                                                |       | 306,987    |       | 129,038     |       |
| Minority interests                                                                           |       | 364,885    |       | 146,646     |       |
| Changes in assets and liabilities – Accounts  receivable                                |       | (1,923,268 | )          | (941,489    | )          |
| Inventories                                                                                  |       | (364,462   | )          | (176,541    | )          |
| Other assets                                                                                 |       | (30,929    | )          | (47,480     | )          |
| Accounts payable                                                                             |       | (354,419   | )          | 551,265     |       |
| Accrued liabilities                                                                          |       | 123,510    |       | 942,246     |       |
| Net cash provided by (used in) operating  activities                                         |       | (1,492,241 | )          | 669,877     |       |
| Investing activities:                                                                        |       |       |       |        |       |
| Cash received from acquisitions                                                              |       | 1,000      |       | 394,111     |       |
| Deposit on acquisition                                                                       |       | —     |       | 1,310,500   |       |
| Purchase of businesses                                                                       |       | (3,570,966 | )          | (16,938,870 | )          |
| Purchase of property and equipment                                                           |       | (169,617   | )          | (218,925    | )          |
| Net cash used in investing activities                                                        |       | (3,739,583 | )          | (15,453,184 | )          |
| Financing activities:                                                                        |       |       |       |        |       |
| Issuance of common stock                                                                     |       | 938,500    |       | —      |       |
| Capital contributions                                                                        |       | —     |       | 2,990,000   |       |
| Debt proceeds                                                                                |       | 5,799,954  |       | 12,784,085  |       |
| Debt payments                                                                                |       | (1,369,451 | )          | (85,019     | )          |
| Loan origination costs                                                                       |       | (1,333     | )          | (25,000     | )          |
| Distributions to minority interests                                                          |       | (114,710   | )          | (86,102     | )          |
| Net cash provided by financing activities                                                    |       | 5,252,960  |       | 15,577,964  |       |
| Net change in cash and cash equivalents                                                      |       | 21,136     |       | 794,657     |       |
| Cash and cash equivalents at beginning of  period                                            |       | 2,072,866  |       | 805,220     |       |
| Cash and cash equivalents at end of period                                                   |       | $          | 2,094,002  |        | $          | 1,599,877 |   |
| Noncash Investing and Financing Activities:                                                  |       |       |       |        |       |
| Seller-financing of acquisitions                                                             |       | $          | 2,140,698  |        | $          | 1,780,000 |   |
| Common stock issued to distinguish  convertible debt                                         |       | $          | 750,000    |        | $          | — |   |
| Cash Paid for Interest and Income Taxes:                                                     |       |       |       |        |       |
| Interest expense                                                                             |       | $          | 502,926    |        | $          | 124,140 |   |
| Income taxes                                                                                 |       | $          | —     |        | $          | — |   |

 

See Accompanying Notes toConsolidated Condensed Financial Statements

 

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**GRAYMARKHEALTHCARE, INC.**

 

**Notes toConsolidated Condensed Financial Statements**

 

**For the Three Months Ended March 31,2008 and 2007**

 

Note1 – Nature of Business

 

Graymark Healthcare, Inc. (the “Company”) is organized inOklahoma.  Prior to December 31,2007, the Company was named Graymark Productions, Inc. and was anindependent producer and distributor of film entertainment content.  On December 31, 2007, the Companycompleted the acquisition of ApothecaryRx, LLC, (“ApothecaryRx”) and SDCHoldings, LLC (“SDC Holdings”), collectively referred to as the “GraymarkAcquisiton.”  For financial reportingpurposes, ApothecaryRx and SDC Holding were considered the acquiring entitiesand historical financial statements prior to December 31, 2007 reflect theactivities of ApothecaryRx and SDC Holdings as adjusted for the effect of therecapitalization which occurred at the date of the Graymark Acquisitioin.  Activities of Graymark Productions, Inc.prior to the acquisition date are no longer reflected in the historicalfinancial statements as Graymark Production was considered to be the acquiredentity.  In conjunction with the GraymarkAcquisition, the Company suspended all operations related to its filmproduction activities.  The Company willcontinue to actively distribute the motion picture projects that it previouslycompleted.

 

Note2 – Summary of Significant Accounting Policies

 

For a complete list of the Company’s significant accounting policies,please see the Company’s 2007 Form 10-K.

 

*Interim Financial Information* – The unaudited consolidated condensedfinancial statements included herein have been prepared in accordance withgenerally accepted accounting principles for interim financial statements andwith Regulation S-X.  Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31,2008 are not necessarily indicative of results that may be expected for theyear ended December 31, 2008.  Theconsolidated condensed financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sForm 10-K for the year ended December 31, 2007.  The December 31, 2007 consolidatedcondensed balance sheet was derived from audited financial statements.

 

*Consolidation* – The accompanying consolidated financialstatements include the accounts of the Company and its wholly owned, majorityowned and controlled subsidiaries.  Allsignificant inter-company accounts and transactions have been eliminated inconsolidation.

 

*Use of estimates* – The preparation of financial statements inconformity with generally accepted accounting principles requires management ofthe Company to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes.  Actual results could differ from thoseestimates.

 

*Revenue recognition* –

 

Pharmacy product sales from the Company’s ApothecaryRx operatingsegment are recorded at the time the customer takes possession of themerchandise.  Customer returns areimmaterial and are recorded at the time merchandise is returned.

 

Sleep center services and product sales from the Company’s SDCoperating segment are recognized in the period in which services and relatedproducts are provided to customers and are 

 

5

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recorded at net realizable amounts estimated to be paid by customersand third-party payers.  Insurancebenefits are assigned to the Company and, accordingly, the Company bills onbehalf of its customers.  The Company hasestablished an allowance to account for sales adjustments that result fromdifferences between the amount billed and the expected realizable amount.  Actual adjustments that result fromdifferences between the payment amount received and the expected realizableamount are recorded against the allowance for sales adjustments and aretypically identified and ultimately recorded at the point of cash applicationor when otherwise determined pursuant to the Company’s collectionprocedures.  Revenues in the accompanyingconsolidated financial statements are reported net of such adjustments.

 

Due to the nature of the healthcare industry and the reimbursementenvironment in which the Company operates, certain estimates are required torecord net revenues and accounts receivable at their net realizable values atthe time products and/or services are provided. Inherent in these estimates is the risk that they will have to berevised or updated as additional information becomes available.  Specifically, the complexity of manythird-party billing arrangements and the uncertainty of reimbursement amountsfor certain services from certain payers may result in adjustments to amountsoriginally recorded.

 

Included in accounts receivable are earned but unbilledreceivables.  Unbilled accountsreceivable represent charges for services delivered to customers for whichinvoices have not yet been generated by the billing system.  Prior to the delivery of services orequipment and supplies to customers, we perform certain certification andapproval procedures to ensure collection is reasonably assured and thatunbilled accounts receivable are recorded at net amounts expected to be paid bycustomers and third-party payers. Billing delays, ranging from several weeks to several months, can occurdue to delays in obtaining certain required payer-specific documentation frominternal and external sources, interim transactions occurring between cyclebilling dates established for each customer within the billing system and newsleep labs awaiting assignment of new provider enrollment identificationnumbers.  In the event that a third-partypayer does not accept the claim for payment, the customer is ultimatelyresponsible.

 

We perform analysis to evaluate the net realizable value of accountsreceivable on a quarterly basis. Specifically, we consider historical realization data, accountsreceivable aging trends, other operating trends and relevant businessconditions.  Because of continuingchanges in the health care industry and third-party reimbursement, it ispossible that our estimates could change, which could have a material impact onour operations and cash flows.

 

*Accounts receivable* – Accounts receivable are reported net ofallowances for sales adjustments and uncollectible accounts of $6,104,923 and$5,946,788 as of March 31, 2008 and December 31, 2007,respectively.  The majority of our accountsreceivable are due from Medicare, private insurance carriers and otherthird-party payors, as well as from customers under co-insurance and deductibleprovisions.

 

The Company’s allowance for sales adjustments and uncollectibleaccounts is primarily attributable to the Company’s SDC operating segment.  Third-party reimbursement is a complicatedprocess that involves submission of claims to multiple payers, each having itsown claims requirements.  In some cases,the ultimate collection of accounts receivable subsequent to the service datesmay not be known for several months.  TheCompany has established an allowance to account for sales adjustments thatresult from differences between the amounts billed to customers and third-partypayers and the expected realizable amounts. The percentage and amounts used to record the allowance for doubtfulaccounts are supported by various methods including current and historical cashcollections, sales adjustments, and aging of accounts receivable.

 

*Goodwill and Intangible Assets* – Goodwill is the excess of the purchaseprice paid over the fair value of the net assets of the acquired business.  Goodwill and other indefinitely-livedintangible assets are not amortized, but are subject to annual impairmentreviews, or more frequent reviews if events or circumstances indicate there maybe an impairment of goodwill.

 

Intangible assets other than goodwill which consist primarily ofcustomer files and covenants not to compete are amortized over their estimateduseful lives.  The remaining lives rangefrom three to fifteen years.  The Companyevaluates the recoverability of identifiable intangible asset whenever eventsor

 

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changes in circumstances indicate that an intangible asset’s carryingamount may not be recoverable.

 

*Discontinued Operations* – In conjunction with the GraymarkAcquisition, management of the Company elected to discontinue its filmproduction and distribution operations. As of March 31, 2008, the Company had film assets of approximately$115,000 which are included in other assets in the accompanying consolidatedbalance sheets.  The income and expensefrom the ongoing marketing and distribution of the current film assets will beaccounted for as discontinued operations.

 

Note3 – Acquisitions

 

During three months ended March 31 2008, the Company’sApothecaryRx operating segment made the following acquisitions:

 
| **Acquisition  Date**  | ** ** | **Business  Acquired**                            | ** ** | **Purchase  Price** | ** ** | **Amount  Financed by  Seller** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|---------------------|------------|--------------------------------------|------------|
|                   |       |                                              |       |                |       |                                 |       |
| January 12, 2008  |       | Rambo Drug  (“Rambo”)                   |       | $                   | 2,558,564  |                                 | $          | 1,020,215 |   |
| February 29, 2008 |       | Thrifty  White Store 726 (“Thrifty”)    |       | 824,910             |       | 99,444                               |       |
| March 26, 2008    |       | Newt’s  Pharmacy (“Newt’s”)   |       | 1,385,381           |       | 267,415                              |       |
| March 26, 2008    |       | Professional  Pharmacy (“Professional”) |       | 942,809             |       | 753,624                              |       |
|                        |            |                                                   |            |                     |            |                                      |            |  |  |

 

The results of operations from the businesses acquired have beenincluded in the Company’s consolidated condensed statements of operationsprospectively from the date of acquisition. Purchase accounting was used to account for all of theseacquisitions.  Below is the purchaseprice allocation used to record each of these purchases:

 
| ** **             | ** ** | **Rambo** | ** ** | **Thrifty** | ** ** | **Newt’s** | ** ** | **Professional** | ** ** |
|------------------------|------------|-----------|------------|-------------|------------|-----------------|------------|------------------|------------|
|                   |       |      |       |        |       |            |       |             |       |   |   |   |   |
| Cash                   |       | $         | 1,000      |        | $          | —          |       | $                | —     |   | $ | — |   |
| Accounts receivable    |       | 7,027     |       | —      |       | 3,626           |       | 1,412            |       |
| Inventory              |       | 350,537   |       | 161,950     |       | 395,546         |       | 398,982          |       |
|                   |       |      |       |        |       |            |       |             |       |
| Total current assets   |       | 358,564   |       | 161,950     |       | 399,172         |       | 400,394          |       |
|                   |       |      |       |        |       |            |       |             |       |
| Property and equipment |       | 33,683    |       | —      |       | 7,500           |       | 5,000            |       |
| Intangible assets      |       | 973,990   |       | 662,960     |       | 462,209         |       | 162,415          |       |
| Goodwill               |       | 1,192,327 |       | —      |       | 516,500         |       | 375,000          |       |
|                   |       |      |       |        |       |            |       |             |       |
| Net assets acquired    |       | $         | 2,558,564  |        | $          | 824,910         |       | $                | 1,385,381  |   | $ | 942,809 |   |

 

The following unaudited pro forma combined results of operations forthe three months ended March 31, 2008 have been prepared as if theacquisitions made by the Company during 2008 had occurred on January 1,2008:

 
| ** ** | ** ** | **2008** | ** ** |
|------------|------------|----------|------------|
| Pro forma: |       |     |       |
| Net sales  |       | $        | 20,918,000 |   |
|       |       |     |       |   |
| Net income |       | $        | 500,000    |   |

 

The pro forma information is presented for informational purposes onlyand is not necessarily indicative of the results of operations that actuallywould have been achieved had the acquisition been consummated as of that time,nor is it intended to be a projection of future results.

 

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Note4 – Goodwill and Other Intangibles

 

Changes in the carrying amount of goodwill by operating segment duringthe three months ended March 31, 2008 were as follows:

 
| ** **             | ** ** | **Apothecary** | ** ** | **SDC** | ** ** | **Total**  | ** ** |
|------------------------|------------|----------------|------------|---------|------------|------------|------------|
|                   |       |           |       |    |       |       |       |   |   |   |
| December 31, 2007 |       | $              | 7,044,551  |    | $          | 13,203,354 |       | $ | 20,247,905 |   |
|                   |       |           |       |    |       |       |       |   |   |   |
| Business acquisitions  |       | 2,083,827      |       | —  |       | 2,083,827  |       |
|                   |       |           |       |    |       |       |       |
| March 31, 2008    |       | $              | 9,128,378  |    | $          | 13,203,354 |       | $ | 22,331,732 |   |

 

As of March 31, 2008, the Company had $22.3 million of goodwillresulting from business acquisitions. Goodwill and intangibles assets with indefinite lives must be tested forimpairment at least once a year. Carrying values are compared with fair values, and when the carryingvalue exceeds the fair value, the carrying value of the impaired asset isreduced to its fair value.  The Companytests goodwill for impairment on an annual basis in the fourth quarter or morefrequently if management believes indicators of impairment exist.  The performance of the test involves atwo-step process.  The first step of theimpairment test involves comparing the fair values of the applicable reportingunits with their aggregate carrying values, including goodwill.  The Company generally determines the fairvalue of its reporting units using the income approach methodology of valuationthat includes the discounted cash flow method as well as other generallyaccepted valuation methodologies.  If thecarrying amount of a reporting unit exceeds the reporting unit’s fair value,the Company performs the second step of the goodwill impairment test todetermine the amount of impairment loss. The second step of the goodwill impairment test involves comparing theimplied fair value of the affected reporting unit’s goodwill with the carrying valueof that goodwill.

 

Intangible assets as of March 31, 2008 include the following:

 
| ** **               | ** ** | **Useful  Life  (Years)** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net**   | ** ** |
|--------------------------|------------|---------------------------|------------|-------------------|------------|-------------------------------|------------|-----------|------------|
|                     |       |                      |       |              |       |                          |       |      |       |
| Apothecary:              |       |                      |       |              |       |                          |       |      |       |
| Customer files           |       | 15                        |       | $                 | 6,520,500  |                          | $          | (354,017  | )          | $ | 6,166,483 |   |
| Covenants not to compete |       | 3 – 5                |       | 1,369,244         |       | (285,950                      | )          | 1,083,294 |       |
| SDC:                     |       |                      |       |              |       |                          |       |      |       |
| Customer relationships   |       | 15                        |       | 480,000           |       | (37,333                       | )          | 442,667   |       |
|                     |       |                      |       |              |       |                          |       |      |       |
| Total                    |       |                      |       | $                 | 8,369,744  |                          | $          | (677,300  | )          | $ | 7,692,444 |   |

 

Note5 – Borrowings

 

The Company’s borrowings by operating segment as of March 31, 2008are as follows:

 
| ** **                      | ** ** | **Rate (1)** | ** ** | **Maturity  Date**                    | ** ** | **2008**   | ** ** |
|---------------------------------|------------|-------------------|------------|---------------------------------------|------------|------------|------------|
|                            |       |              |       |                                  |       |       |       |
| Apothecary:                     |       |              |       |                                  |       |       |       |
| $20 million bank line of credit |       | 4.5%              |       | June 2008                        |       | $          | 17,297,000 |   |
| Seller financing                |       | 6.0 – 7.25%  |       | July 2009 – April 2011 |       | 4,731,347  |       |
| Non-compete agreements          |       | 0.0 – 7.65%  |       | Dec. 2009 – Nov. 2012  |       | 1,191,556  |       |
|                            |       |              |       |                                  |       |       |       |
|                            |       |              |       |                                  |       | 23,219,903 |       |
|                                 |            |                   |            |                                       |            |            |            |  |

 

8

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| ** **                                 | ** ** | **Rate (1)** | ** ** | **Maturity  Date**               | ** ** | **2008**    | ** ** |
|--------------------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------|------------|
| SDC:                                       |       |              |       |                             |       |        |       |
| Senior bank debt                           |       | 5.14%             |       | Feb. 2014                   |       | 11,960,000  |       |
| Notes payable                              |       | 6.69%             |       | Feb. 2012                   |       | 813,245     |       |
| $1 million bank line of credit             |       | 4.71%             |       | Jan. 2009                   |       | 603,278     |       |
| Sleep center working capital notes payable |       | 5.25 – 8.25% |       | Dec. 2009 – Sept. 2012 |       | 801,178     |       |
| Short-term equipment leases                |       | —            |       | Feb. 2009                   |       | 109,710     |       |
| Note payable on vehicle                    |       | 2.9%              |       | Nov. 2012                   |       | 55,999      |       |
|                                       |       |              |       |                             |       |        |       |
|                                       |       |              |       |                             |       | 14,343,410  |       |
|                                       |       |              |       |                             |       |        |       |
| Total borrowings                           |       |              |       |                             |       | 37,563,313  |       |
| Less:                                      |       |              |       |                             |       |        |       |
| Short-term debt                            |       |              |       |                             |       | (18,009,988 | )          |
| Current portion of long-term debt          |       |              |       |                             |       | (3,156,645  | )          |
|                                       |       |              |       |                             |       |        |       |
| Long-term debt                             |       |              |       |                             |       | $           | 16,396,680 |   |
|                                            |            |                   |            |                                  |            |             |            |  |

 

----

(1) Effective rate as of March 31, 2008

 

Note6 – Income Taxes

 

Prior to December 31, 2007, the taxable income and expenses ofApothecaryRx and SDC Holdings (collectively, the reporting entity for financialreporting purposes) flowed through and was reported at the member level.

 

Note7 – Capital Structure

 

On January 11, 2008, the Company concluded a private placement ofcommon stock and issued 599,999 shares of common stock (2,999,996 shares beforeeffect of reverse stock split – see Note 10). The net proceeds of the private placement offering were $938,500 ($1.56per share) after deduction of $111,500 in offering costs.  In conjunction with the private placement,the Company issued common stock purchase warrants exercisable for the purchaseof 90,000 common stock shares for $1.93 each.

 

During January 2008, in conjunction with the closing of theCompany’s private placement of common stock, the Company paid-off one of itsconvertible notes for $750,000 in cash and exchanged the remaining convertiblenote for 750,000 shares of the Company’s common stock (3,750,000 shares beforeeffect of reverse stock split – see Note 10). In connection with the exchange of shares, the Company issued commonstock purchase warrants exercisable for the purchase of 112,500 common stockshares for $1.10 each.

 

Note8 – Stock Options and Warrants

 

Information with respect to stock options and warrants outstandingfollows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Average  Exercise  Price** | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------|------------|
|                                  |       |       |       |                         |       |   |
| Outstanding at December 31, 2007 |       | 1,064,650  |       | $                            | 7.15       |   |
| Granted - warrants                    |       | 202,500    |       | 1.45                         |       |
| Exercised                             |       | —     |       | —                       |       |
| Forfeited                             |       | —     |       | —                       |       |
|                                  |       |       |       |                         |       |
| Outstanding at March 31, 2008    |       | 1,267,150  |       | $                            | 6.25       |   |
|                                       |            |            |            |                              |            |  |  |

 

9

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Note9 – Segment Information

 

The Company operates in two reportable business segments:  ApothecarRx and SDC.  The Apothecary operating segment operatesretail pharmacy stores throughout the central United States.  The SDC operating segment operates sleepdiagnostic testing labs in Oklahoma and Texas. The Company’s film production and distribution activities are includeddiscontinued operations.  The Company’sremaining operations which primarily involve administrative activitiesassociated with operating as a public company are identified as “Other.”

 

Reportable business segment information follows:

 
| ** **                       | ** ** | **Three Months Ending  March 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                             |       |                                              |       |   |   |
| Sales to external customers:     |       |                                              |       |   |   |
| Apothecary                       |       | $                                                 | 15,880,702 |   | $ | 7,041,879 |   |
| SDC                              |       | 3,162,623                                         |       | 1,460,346 |   |
|                             |       |                                              |       |   |   |
| Total                            |       | $                                                 | 19,043,325 |   | $ | 8,502,225 |   |
|                             |       |                                              |       |   |   |   |   |
| Segment operating profit (loss): |       |                                              |       |   |   |
| Apothecary                       |       | $                                                 | 56,315     |   | $ | 69,104 |   |
| SDC                              |       | 481,750                                           |       | (2,912 | ) |
| Discontinued operations          |       | 21,520                                            |       | — |   |
| Other                            |       | (174,130                                          | )          | — |   |
|                             |       |                                              |       |   |   |
| Total                            |       | $                                                 | 385,455    |   | $ | 66,192 |   |

 
| ** **              | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Segment assets:         |       |                     |       |                        |       |
| Apothecary              |       | $                        | 28,501,350 |                        | $          | 21,583,680 |   |
| SDC                     |       | 19,843,052               |       | 18,730,505                  |       |
| Discontinued operations |       | 228,291                  |       | 335,507                     |       |
| Other                   |       | 474,367                  |       | 482,945                     |       |
|                    |       |                     |       |                        |       |
| Total                   |       | $                        | 49,047,060 |                        | $          | 41,132,637 |   |

 

Note10 – Reverse Stock Split

 

On March 13, 2008, the Company’s board of directors approved areverse split of the Company’s common stock at a ratio of 1 for 5 shares.  The effective date of the reverse split was April 11,2008.  The effect of the reverse splitwas a  reduction of our outstandingcommon stock shares from 117,701,997 to 23,540,399 shares, subject toadjustment for elimination of fractional shares.  All references to shares in the consolidatedcondensed financial statements and the accompanying notes, including but not limitedto the number of shares and per share amounts, unless otherwise noted, havebeen adjusted to reflect the reverse split retroactively.  Previously awarded options and warrants topurchase shares of the Company’s common stock have also been retroactivelyadjusted to reflect the stock split.

 

10

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Note11 – Subsequent Events

 

On April 23, 2008, the Company’s board of directors grantedoptions to the Company’s board of directors and certain Company officers forthe purchase of 90,000 shares of the Company’s common stock at a price of$3.75.  The options expire in April 2013.

 

11

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Overview**

 

Graymark Healthcare, Inc. (“Graymark”) is organized inOklahoma.  Prior to December 31,2007, we were named Graymark Productions, Inc. and an independent producerand distributor of film entertainment content. On January 2, 2008, we completed the acquisition of ApothecaryRx,LLC, (“ApothecaryRx”) and SDC Holdings, LLC (“SDC Holdings”), collectivelyreferred to as the “Graymark Acquisition.” For financial reporting purposes, Graymark was deemed acquired byApothecaryRx and SDC Holdings and, accordingly, the historical financialstatements prior to December 31, 2007 are those of ApothecaryRx and SDCHoldings as adjusted for the effect of the Graymark Acquisition.  The activities of Graymark prior to theGraymark Acquisition are no longer reflected in the historical financialstatements as it was considered to be the acquired entity.  Goodwill of $5,426,815 was recorded as aresult of the Graymark Acquisition reflecting the fair market value of commonstock issued and liabilities assumed in excess of Graymark’s identifiableassets at the date of the Graymark Acquisition. In conjunction with the Graymark Acquisition, all motion pictureproduction operations were discontinued. We will continue actively to distribute the motion pictures produced byGraymark.

 

On March 13, 2008, our board of directors approved a reverse splitof our common stock at a ratio of 1 for 5 shares.  The effective date of the reverse split wasset as April 11, 2008.  The effectof the reverse split was a  reduction ofour outstanding common stock shares from 117,701,997 to 23,540,399 shares,subject to adjustment for elimination of fractional shares.

 

ApothecaryRx is organized in Oklahoma and began its operations on July 3,2006.  Through ApothecaryRx, we acquireand operate independent retail pharmacy stores selling prescription drugs and asmall assortment of general merchandise including diabetic merchandise, overthe counter drugs, beauty products and cosmetics, seasonal merchandise,greeting cards, and convenience foods. As of March 15, 2008, we operated stores in Colorado, Illinois,Minnesota, Missouri and Oklahoma.  Weexpect to expand our operations to additional states in the future, primarilyin the central United States.  Theresults of operations from our retail pharmacy locations are included in our “Apothecary”operating segment.

 

SDC Holdings is organized in Oklahoma and began its operations on February 1,2007.  Through SDC Holdings, we providediagnostic sleep testing services and treatment for sleep disorders at sleepdiagnostic testing labs in Oklahoma and Texas. Our products and services are used primarily by patients withobstructive sleep apnea.  These labsprovide monitored sleep diagnostic testing services to determine sleepdisorders in the patients being tested. The majority of the sleep testing is to determine if a patient hasobstructive sleep apnea.  Positive airwaypressure provided by sleep/personal ventilation (or “CPAP”) equipment is theAmerican Academy of Sleep Medicines preferred method of treatment forobstructive sleep apnea.  Our sleepdiagnostic facilities also determine the correct pressure settings for patienttreatment with positive airway pressure. We sell CPAP equipment and supplies to patients who have tested positivefor sleep apnea and have had their positive airway pressure determined.  The CPAP equipment is a medical device andcan only be dispensed pursuant to a physician’s prescription.  There are minority ownership interests in ourtesting facilities.  The minority ownersare physicians in the geographical area being served by the diagnostic sleeptesting facility.  The results ofoperations from our sleep diagnostic testing labs are included in our “SDC”operating segment.

 

**Apothecary Operating Segment**

 

As of March 31, 2008, we owned and operated 14 retail pharmacieslocated in Colorado, Illinois, Missouri, Minnesota, and Oklahoma.  We acquire financially successfulindependently-owned retail pharmacies from long-term owners that areapproaching retirement.  Our acquiredpharmacies have successfully maintained market share due to the convenient  proximity to health care providers andservices, high customer service levels, longevity in the community, competitivepricing and supportive services and products such as compoundedpharmaceuticals, durable medical equipment, and assisted and group livingdeliveries.  Our acquired and targetacquisition stores are in mid-size, economically-stable 

 

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communities.  We believe that asignificant amount of the value of the acquired pharmacies resides in theirname and key staff relationships in the community.  Following acquisition, we maintain thehistoric store name and key staff personnel.

 

In our Apothecary operating segment, we derive our revenue primarilyfrom the retail sale of prescription drugs, non-prescription over-the-counterdrugs and health related products.  Weare unlike traditional full-line retail pharmacies in that most of our storesoffer a very limited amount of what is known as “front-end merchandise” (thatis, cosmetics, gift and sundry items and photographic developmentservices).  Two of our 14 pharmaciesprovide pharmaceutical compounded prescriptions.  Compounded pharmaceuticals are physicianprescribed and are specifically mixed and blended from bulk chemicals forpatients’ treatment; generally for conditions that the attending physiciandeems are not effectively treated by manufactured pharmaceuticals available instandard formats or dosages or to which the patient has some form ofsensitivity.  Our pharmacies aregenerally located within or closely adjacent to hospitals and major medicalcomplexes, and cater to patients of those healthcare providers.  Other than some compounded prescriptions, ourpharmacy services do not typically include intravenous infusion and injectablemedications that are offered by hospital or home infusion pharmacies.

 

Following their acquisition, all of our pharmacies are converted to astandardized computer platform.  Thecomputer platform we use is commercially available and represents modestinvestment but it allows for standardized pricing models, comparison of sitemetrics, low cost training and ease of reporting.  Our pharmacy computer system profilescustomer medical and other relevant information, supplies customers withinformation concerning their drug purchases for income tax and insurancepurposes and prepares prescription labels and receipts.  The computer platform also expedites transactionswith third-party plans by electronically transmitting prescription informationdirectly to the third-party plan and providing on-line adjudication.  At the time a prescription is filled, on-lineadjudication confirms customer eligibility, prescription coverage, pricing andco-payment requirements and automatically bills the respective plan.  On-line adjudication also reduces losses fromrejected claims and eliminates a portion of the administrative burden relatedto the billing and collection of receivables and related costs.

 

Our pharmacy front-end merchandising strategy is to provide a limitedselection of competitively priced branded drugstore healthcare products andgift items, unlike the larger pharmacy chains that carry a variety ofnon-healthcare products.  To furtherenhance customer service and loyalty, we attempt to maintain a consistentin-stock position in our offered healthcare merchandise.  We offer primarily brand name healthcare careproducts, including over-the-counter items, and some gift product items.

 

**SDC Operating Segment**

 

**As**of March 31, 2008, we operated 10 sleep diagnosis centers inOklahoma and Texas and had under development two sleep diagnosis centers inTexas.  Each sleep center located inOklahoma is owned by a limited liability company and each of the sleep centerslocated in Texas is owned by a limited partnership.  The limited liability companies and some ofthe limited partnerships are not wholly-owned by us.  We are the manager of each limited liabilitycompany and the general partner of each limited partnership.

 

At these sleep centers, we conduct sleep studies to determine whetherthe patients referred to us suffer from sleep disorders and if so the severityof their condition.  Our facilities aredesigned to diagnose and assist in the treatment of the full range of sleepdisorders (there are currently over 80 different possible diagnoses of sleepdisorders); however, the most common referral to our facilities is ObstructiveSleep Apnea (“OSA”).  If a patient isdetermined to suffer from obstructive sleep apnea, the patient and the patient’sreferring physician are offered a comprehensive sleep program.  This includes diagnosis, titration procedure(that is, the process of determining the optimal pressure to prescribe for theContinuous Positive Airway Pressure, or CPAP device), and the therapeuticintervention.  This offering provides aone-stop-shop approach to servicing patient’s needs.  The principal sleep disorder products wecurrently market are personal non-invasive ventilation support systems and the associateddisposable supplies that are used in the treatment of obstructive sleep apneato prevent temporary airway closure during sleep.

 

13

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Obstructive sleep apnea is considered to be one of the most commonsleep problems.  OSA, is a condition thatcauses the soft tissue in the rear of the throat to narrow and repeatedly closeduring sleep.  Oxygen deficiency,elevated blood pressure and increased heart rate associated with OSA arerelated to increased risk of cardiovascular morbidity, stroke and heartattack.  Additionally, OSA may result inexcessive daytime sleepiness, reduced cognitive functions, including memoryloss, lack of concentration, depression and irritability.  According to National Heart, Lung and BloodInstitute of the National Institutes of Health, approximately 80% of people inthe United States who suffer from sleep apnea remain undiagnosed.  Increased awareness of OSA among doctors andpatients in recent years is expected to continue fueling growth of the OSAdiagnostic and treatment market at a rate of 15% to 20%.

 

The diagnosis of obstructive sleep apnea typically requires monitoringa patient during sleep.  During overnighttesting, which usually takes place in a clinical setting, respiratoryparameters and sleep patterns are monitored along with other vital signs,providing information about the quality of an individual’s sleep.  At the end of 2005, it was estimated thatthere were approximately 3,000 sleep laboratories and centers in the UnitedStates.

 

Continuous positive airway pressure therapy, commonly referred to asCPAP therapy, has evolved as the primary method for the treatment ofobstructive sleep apnea, in part because it is less invasive and morecost-effective than surgery.  Unlikesurgery, which may only result in reduced snoring, CPAP therapy actuallyreduces or eliminates the occurrence of obstructive sleep apnea.  During this therapy, a patient sleeps with anasal or facial mask connected by a tube to a small portable airflow generatorthat delivers room air at a predetermined continuous positive pressure.  The continuous air pressure acts as apneumatic splint to keep the patient’s upper airway open and unobstructed.  As a result, the cycle of airway closuresthat leads to the disruption of sleep and other symptoms which characterizeobstructive sleep apnea, is prevented or dramatically reduced.

 

CPAP is generally not a cure but a therapy for managing the chroniccondition of obstructive sleep apnea, and therefore, must be used on a dailybasis as long as treatment is required. Patient compliance has been a major factor in the efficacy of CPAPtreatment.  Early generations of CPAPunits provided limited patient comfort and convenience.  More recently, product innovations to improvepatient comfort and compliance have been developed.

 

The primary product we sell is a continuous positive airway pressuresystems, commonly referred to as CPAP systems, that consist of a compact flowgenerator connected to a dual-port, air-filled cushion face mask and are usedas therapy for obstructive sleep apnea. The face mask is attached to a single-patient use positive endexpiratory pressure valve designed to maintain positive airway pressure withthe objective of increasing patient comfort and acceptance of thetreatment.  The CPAP systems providea  non-invasive and more comfortable wayfor treating obstructive sleep apnea.

 

CPAP flow generators are electro-mechanical devices that delivercontinuous positive airway pressure through a nasal or full face mask to apatient suffering from obstructive sleep apnea in order to keep the patient’sairway open during sleep.  Given theimportance of patient compliance in treating obstructive sleep apnea, theproducts are easy to use, lightweight, small and quiet, making them relativelyunobtrusive at the bedside.  The latestgeneration of these products are self-adjusting CPAP devices that use patternrecognition technology to respond to changes in breathing patterns, asindividual patient needs change.  It isthe responsibility of the physician prescribing the CPAP to determine theappropriate type of device that we will supply for each patient.

 

For patients with more severe or complex obstructive sleep apnea, thebi-level CPAP is available.  These electro-mechanicaldevices allow inspiratory and expiratory pressures to be independentlyadjusted.

 

**Mergers and Acquisitions**

 

On January 2, 2008, the Graymark Acquisition was completed.  Although the Graymark 

 

14

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Acquisitionwas completed on January 2, 2008, we have accounted for the GraymarkAcquisition as though it occurred on December 31, 2007 because ourshareholders approved the Graymark Acquisition in December 2007 andeffectively consummated the associate change in control.  As part of the Graymark Acquisition, wedelivered 102,000,000 shares of our common stock to the former equity interestowners of ApothecaryRx and SDC Holdings. Roy T. Oliver and Stanton Nelson received 33,875,730 and 12,861,180 sharesof common stock, respectively, as a result of their direct and indirect equityownership interests in ApothecaryRx and SDC Holdings.  Prior to the Graymark Acquisition, Mr. Nelsonserved on our Board of Directors and Mr. Oliver was one of our greater than10% shareholders.

 

For financial reporting purposes, ApothecaryRx and SDC Holding wereconsidered the acquiring entities and historical financial statements prior to December 31,2007 reflect the activities of ApothecaryRx and SDC Holdings as adjusted forthe effect of the Graymark Acquisition. Activities of Graymark prior to the Graymark Acquisition are no longerreflected in the historical financial statements included in this report.  Goodwill of $5,426,815 was recorded inconnection with the Graymark Acquisition reflecting the fair market value ofcommon stock issued and liabilities assumed in excess of Graymark’sidentifiable assets at the date of the merger.

 

During the three months ended March 31, 2008, our Apothecaryoperating segment completed the following acquisitions:

 
| **Acquisition  Date**  | ** ** | **Business  Acquired**                            | ** ** | **Purchase  Price** | ** ** | **Amount  Financed  by  Seller** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|---------------------|------------|----------------------------------|------------|
|                   |       |                                              |       |                |       |                             |       |
| January 12, 2008  |       | Rambo  Pharmacy (“Rambo”)               |       | $                   | 2,558,564  |                             | $          | 1,020,215 |   |
| February 29, 2008 |       | Thrifty  White Store 726 (“Thrifty”)    |       | 824,910             |       | 99,444                           |       |
| March 26, 2008    |       | Newt’s  Pharmacy (“Newt’s”)   |       | 1,385,381           |       | 267,415                          |       |
| March 26, 2008    |       | Professional  Pharmacy (“Professional”) |       | 942,809             |       | 753,624                          |       |
|                        |            |                                                   |            |                     |            |                                  |            |  |  |

 

**Impairment of Acquisition Goodwill**

 

Goodwill and other indefinite-lived assets are not amortized, but aresubject to impairment reviews annually, or more frequent if necessary.  We are required to evaluate the carryingvalue of goodwill during the fourth quarter of each year and between annualevaluations if events occur or circumstances change that would more likely thannot reduce the fair value of the related operating unit below its carryingamount.  These circumstances may includewithout limitation

 

·                                          a significant adverse change in legal factorsor in business climate,

 

·                                          unanticipated competition, or

 

·                                          an adverse action or assessment by aregulator.

 

In evaluating whether goodwill is impaired, we compare the fair valueof the operating unit to which the goodwill is assigned to the operating unit’scarrying amount, including goodwill.  Thefair value of the operating unit will be estimated using a combination of theincome, or discounted cash flows, approach and the market approach that utilizecomparable companies’ data.  If thecarrying amount of the operating unit (*i.e.*,pharmacy or sleep center lab) exceeds its fair value, then the amount of theimpairment loss must be measured.  Theimpairment loss would be calculated by comparing the implied fair value of anoperating unit to its carrying amount. In calculating the implied fair value of the operating unit goodwill,the fair value of the operating unit will be allocated to all of the otherassets and liabilities of that operating unit based on their fair values.  The excess of the fair value of an operatingunit over the amount assigned to its other assets and liabilities will be theimplied fair value of goodwill.  Animpairment loss will be recognized when the carrying amount of goodwill exceedsits implied fair value.

 

15

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**Results of Operations**

 

The following table sets forth selected results of our operations forthe three months ended March 31, 2008. We operate in two reportable business segments:  Apothecary and SDC.  The Apothecary operating segment includes theoperations of our retail pharmacy stores. The SDC operating segment includes the operations from our sleepdiagnostic testing labs and related equipment sales.  Our film production and distribution activitiesare included as discontinued operations. The following information was derived and taken from our unauditedfinancial statements appearing elsewhere in this report.

 

**Comparison of the Three-Month Periods Ended March 31,2008 and 2007**

 

**Consolidated Totals**

 
| ** **                                                           | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
|                                                                 |       |                                                               |       |   |   |
| Net revenues                                                         |       | $                                                                  | 19,043,325 |   | $ | 8,502,225 |   |
| Cost of sales and services                                           |       | 13,274,636                                                         |       | 5,873,169 |   |
| Operating expenses                                                   |       | 4,412,213                                                          |       | 2,115,543 |   |
| Operating income                                                     |       | 1,356,476                                                          |       | 513,513 |   |
| Interest expense, net                                                |       | 527,179                                                            |       | 300,675 |   |
| Net income before minority interests and  provision for income taxes |       | 829,297                                                            |       | 212,838 |   |
| Minority interests                                                   |       | (364,885                                                           | )          | (146,646 | ) |
| Provision for income taxes                                           |       | (100,477                                                           | )          | — |   |
| Net income from continuing operations                                |       | 363,935                                                            |       | 66,192 |   |
| Income from discontinued operations                                  |       | 21,520                                                             |       | — |   |
| Net income                                                           |       | $                                                                  | 385,455    |   | $ | 66,192 |   |

 

*Net revenues* increased $10.5 million during the three months ended March 31,2008 compared with the first three months of 2007.  The increase in net revenues was primarilydue to

 

·                  the six acquisitions made by our Apothecaryoperating segment during the nine months ended December 31, 2007 and thethree months ended March 31, 2008 which resulted in an increase in revenueof $8.9 million,

 

·                  the acquisition made by our SDC operatingsegment on January 31, 2007 which resulted in an increase of revenue of$1.0 million related to three months of operations in 2008 versus two months inthe 1st quarter of 2007 and

 

·                  an increase in revenue of $0.7 million due toadditional sleep studies performed by our SDC operating segment.  See the Segment Analysis, below,  for additional information.

 

*Cost of sales and services* increased $7.4 million during the threemonths ended March 31, 2008 compared with the first three months of2007.  The increase in cost of sales andservices was primarily due to

 

·                  the six acquisitions made by our Apothecaryoperating segment during the nine months ended

 

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December 31,2007 and the three months ended March 31, 2008 which resulted in anincrease in cost of sales and services of $6.8 million,

 

·                  the acquisition made by our SDC operatingsegment on January 31, 2007 which resulted in an increase of cost of salesand services of $0.3 million related to three months of operations in 2008versus two months in the 1st quarter of 2007 and

 

·                  an increase in costs of sales andservices of $0.3 million due to additional sleep studies performed by our SDCoperating segment.  See the SegmentAnalysis, below,  for additionalinformation.

 

*Operatingexpenses*increased $2.3 million during the three months ended March 31, 2008compared with the first three months of 2007. The increase in operating expenses is primarily due to the acquisitionsmade by our Apothecary and SDC operating segments which resulted in an increasein operating expenses of $1.5 million and $0.4 million, respectively.  Included in the consolidated operatingexpenses is approximately $200,000 of overhead incurred at the Graymark levelwhich includes the costs of being a public company.  See the Segment Analysis, below,  for additional information.

 

*Netinterest expense**increased* approximately $227,000 duringthe three months ended March 31, 2008 compared with the first three monthsof 2007.  The increase in net interestexpense is primarily due to the increase in borrowings resulting from theacquisitions made by our Apothecary and SDC operating segments.

 

*Minorityinterests*increased approximately $250,000 during the three months ended March 31,2008 compared with the first three months of 2007.  The minority interests are the equityownership interests in our SDC subsidiaries that we do not wholly own.  The increase in minority interests wasprimarily due to the increased net income of those ours SDC subsidiariesattributable to the equity ownership interests we do not own.

 

*Provisionfor income taxes*was $100,477 during the three months ended March 31, 2008.  During the three months ended March 31,2007, we were classified as a partnership for federal and state income taxpurposes and were not subject to income tax.

 

*Incomefrom discontinued operations* were approximately $22,000 during the three monthsended March 31, 2008 and represent the net income from our film operationswhich were discontinued on January 1, 2008.

 

**Apothecary Operating Segment**

 
| ** **                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
|                                         |       |                                                               |       |   |   |
| Net revenues                                 |       | $                                                                  | 15,880,702 |   | $ | 7,041,879 |   |
| Cost of sales                                |       | 12,190,627                                                         |       | 5,443,571 |   |
| Operating expenses                           |       | 3,332,421                                                          |       | 1,388,439 |   |
| Operating income                             |       | 357,654                                                            |       | 209,869 |   |
| Interest expense, net                        |       | 285,791                                                            |       | 140,765 |   |
| Net income before provision for income taxes |       | $                                                                  | 71,863     |   | $ | 69,104 |   |

 

*Netrevenues*increased $8.8 million during the three months ended March 31, 2008compared with the first three months of 2007. During the three months ended March 31, 2008, we operated 12pharmacy locations until February 29, 2008 when we acquired the customerfiles from another pharmacy which were incorporated into our existingfacilities and until March 26, 2008 when we acquired two pharmacylocations for a total of 14 locations. During the three months ended March 31, 2007, we 

 

17

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operated five pharmacylocations.  The increase in our pharmacylocations resulted in an increase in net revenues of $8.9 million.  Revenues during the three months ended March 31,2008 from existing (or same store) pharmacy locations decreased $0.1 millioncompared with the 1st quarter of 2007.

 

*Costof sales*increased $6.7 million during the three months ended March 31, 2008compared with the first three months of 2007. This increase was primarily due to the increase in pharmacy locationsoperated in 2008.  Cost of sales as apercentage of net revenues was 77% during each of the three months ended March 31,2008 and 2007.

 

*Operatingexpenses*increased $1.9 million during the three months ended March 31, 2008compared with the first three months of 2007. This increase was primarily due to

 

·                  approximately $1.5 million in additional expensesassociated with new pharmacy locations,

 

·                  $0.1 million in increased costs at existing (or samestore) locations and

 

·                  $0.3 million in increased operational overhead.

 

*Netinterest expense*increasedapproximately $145,000 during the three months ended March 31, 2008compared with the first three months of 2007. The increase in net interest expenses was primarily due to the increasein borrowings resulting from acquisitions. Total borrowings for our Apothecary operating segment were approximately$23.2 million and $10.0 million at March 31, 2008 and 2007, respectively.

 

**SDC Operating Segment**

 
| ** **                                                          | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
|                                                                |       |                                                               |       |   |   |
| Net revenues                                                        |       | $                                                                  | 3,162,623  |   | $ | 1,460,346 |   |
| Cost of sales and services                                          |       | 1,084,009                                                          |       | 429,598 |   |
| Operating expenses                                                  |       | 858,658                                                            |       | 727,103 |   |
| Operating income                                                    |       | 1,219,956                                                          |       | 303,645 |   |
| Interest expense, net                                               |       | 240,317                                                            |       | 159,910 |   |
| Net income before minority interests and provision for income taxes |       | 979,639                                                            |       | 143,735 |   |
| Minority interests                                                  |       | 364,885                                                            |       | 146,646 |   |
| Net income (loss) before provision for income taxes                 |       | $                                                                  | 614,754    |   | $ | (2,911 | ) |

 

*Netrevenues*increased $1.7 million during the three months ended March 31, 2008compared with the first three months of 2007. This increase was primarily due to

 

·                  the acquisition of our sleep operations on January 31,2007 which resulted in only two months of operations during the first threemonths of 2007 compared with three months of operations ended March 31,2008 which resulted in an increase in net revenues of approximately $1.0million and

 

·                  an increase in the number of sleep studies performedin February and March 2008 compared with the same period in 2007 thatconsequently resulted in an increase in net revenues of approximately $0.7million.

 

*Costof sales and services* increased approximately $654,000 during the three months ended March 31,2008 compared with the first three months of 2007.  This increase was primarily due to

 

·                  the acquisition of our sleep operations on January 31,2007 which resulted in only two months of operations during the first threemonths of 2007 compared with three months of operations ended 

 

18

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March 31,2008 that accordingly resulted in an increase in cost of sales and services ofapproximately $343,000 and

 

·                  an increase in the number of sleep studies performedin February and March 2008 compared with the same period in 2007which resulted in an increase in cost of sales and services of approximately$311,000.

 

Cost of sales andservices as a percent of net revenues was 34% and 29% during the three monthsended March 31, 2008 and 2007, respectively.* *The increase in costof sales and services as a percent of net revenues is primarily due to an increasein the number of and salaries for sleep center technicians.

 

*Operatingexpenses*increased approximately $132,000 during the three months ended March 31,2008 compared with the first three months of 2007.  This increase is primarily due to an increasein operating expenses associated with having three months of operation in thefirst three months of 2008 versus only two months in the 1st quarterof 2007 which was offset by a reduction in operating expenses efficienciesgained in 2008.

 

*Netinterest expense*increasedapproximately $80,000 during the three months ended March 31, 2008compared with the first three months of 2007. The increase in net interest expenses is primarily due to an increase inborrowings.  Total borrowings for our SDCoperating segment were approximately $14.3 million and $13.7 at March 31,2008 and 2007, respectively.

 

*Minorityinterests*increased approximately $218,000 during the three months ended March 31,2008 compared with the first three months of 2007.  The minority interests are the equityownership interests in our SDC subsidiaries that we do not wholly own.  The increase in minority interests wasprimarily due to the increased net income of those ours SDC subsidiariesattributable to the equity ownership interests we do not own.

 

**Liquidityand Capital Resources**

 

Our liquidity andcapital resources are provided principally through cash generated fromoperations, loan proceeds and equity offerings. Our cash and cash equivalents at March 31, 2008 totaledapproximately $2,094,000.  As of March 31,2008, we had a working capital deficit of approximately $11,153,000.

 

Our operatingactivities during the three months ended March 31, 2008 used net cash ofapproximately $1,492,000 compared to operating activities in the 1st quarter of2007 that provided approximately $670,000. The increase in cash flows used by operating activities was primarilyattributable to an increase in accounts receivable, inventories, and a decreasein accounts payable.  These cash useswere offset by an increase in accrued liabilities.  In the 1st quarter of 2008, our operatingactivities included net income of $385,455 which was increased by depreciationand amortization of $306,987 and minority interests of $364,885.

 

Our investingactivities during the three months ended March 31, 2008 used net cash ofapproximately $3,740,000 compared to the 1st quarter of 2007 during which weused approximately $15,453,000 for investing activities.  The decrease in the cash used in investingactivities was attributable to a decrease in the amount of our businessacquisitions.  During the three monthsended March 31, 2008, we used $3,570,966 for the purchases of businessescompared to $16,938,870 in the 1st quarter of 2007.

 

Our financingactivities during the three months ended March 31, 2008  provided net cash of approximately $5,253,000compared to the 1st quarter of 2007 during which financing activities providedapproximately $15,578,000.  The decreasein net cash provided by financing activities was due to a decrease in debtproceeds and capital contributions and an increase in debt payments which wasoffset by the issuance of common stock. During the three months ended March 31, 2008, we received $938,500in proceeds from the issuance of common stock. Debt proceeds were $5,799,954 during the three months ended March 31,2008 compared with debt proceeds of $12,784,085 during the 1st quarter of2007.  Debt payments were $1,369,451during the three months ended March 31, 2008 compared with debt proceedsof $85,019 during the 1st quarter of 2007.

 

19

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We expect to meetour obligations as they become due through available cash and funds generatedfrom our operations, supplemented as necessary by debt financing.  We expect to generate positive workingcapital through our operations.  However,there are no assurances that we will be able to either achieve a level ofrevenues adequate to generate sufficient cash flow from operations or obtainadditional financing through debt financing to support our capital commitmentsand working capital requirements.  Ourprincipal capital commitments during the next 12 months primarily involvepayments of our indebtedness and lease obligations of approximately $20,858,000as of March 31, 2008.

 

***Financial Commitments***

 

We do not have anycapital commitments that we cannot meet with our current capitalresources.  We are currently negotiatingwith the current lender replacement financing of our long-term indebtedness,including the portion that is due within the next 12 months (the short-termportion). We anticipate completion of this replacement financing during May 2008;however, there is no assurance that this will be achieved.  We expect to meet our obligations as theybecome due through available cash and funds generated from our operationssupplemented as necessary by debt financing. We neither have any plans nor anticipate the need to raise additionalequity capital during the next 12 months; however, we may receive additionalfunds from the exercise of outstanding warrants and stock options, the exerciseof which is generally not within our control.

 

Our futurecommitments under contractual obligations by expected maturity date at March 31,2008 are as follows:

 
| ** **       | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** | **Total**  | ** ** |
|------------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|------------|------------|
|             |       |                      |       |               |       |               |       |                       |       |       |       |
| Short-term debt  |       | $                         | 18,009,988 |               | $          | —             |       | $                          | —     |       | $          | — |   | $ | 18,009,988 |   |
| Long-term debt   |       | 1,803,181                 |       | 8,640,234          |       | 4,038,888          |       | 10,171,442                 |       | 24,653,745 |       |
| Operating leases |       | 1,044,555                 |       | 2,673,041          |       | 582,389            |       | 33,250                     |       | 4,333,235  |       |
|             |       |                      |       |               |       |               |       |                       |       |       |       |
|             |       | $                         | 20,857,724 |               | $          | 11,313,275         |       | $                          | 4,621,277  |       | $          | 10,204,692 |   | $ | 46,996,968 |   |

 

**AccountingMethods**

 

The application ofthe following accounting policies, which are important in presenting ourfinancial position and results of operations, requires significant judgmentsand estimates on the part of our management. For a summary of all of our accounting policies, including theaccounting policies discussed below, see Note 2 to the audited consolidatedfinancial statements appearing in our 2007 Annual Report on Form 10-K.

 

Our consolidatedfinancial statements have been prepared in accordance with United Statesgenerally accepted accounting principles (or U.S. GAAP).

 

**RecentAccounting Pronouncements**

 

*SFAS157* – In September 2006,the Financial Accounting Standard Board (the “FASB”) issued Statement No. 157,*“Fair Value Measurements”*  (“SFAS 157”).  SFAS 157 addresses howcompanies should measure fair value when they are required to use a fair valuemeasure for recognition or disclosure purposes under U.S. GAAP.   SFAS 157 defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements.  SFAS 157 is effective forfiscal years beginning after November 15, 2007, with earlier adoption permitted.  We are assessing the impact of the adoptionof this SFAS 157.

 

*SFAS159* – In February 2007,the FASB issued Statement No. 159, “The Fair Value Option for FinancialAssets and Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial assetsand liabilities at fair value. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15,2007.  We are currently assessing theimpact of SFAS 159 on our consolidated financial statements.

 

20

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*SFAS141(R) and SFAS 160*– In December 2007, the FASB issued SFAS No. 141 (Revised), *“Business Combinations”*(“SFAS 141 (R)”),replacing SFAS No. 141, *“BusinessCombinations”* (“SFAS 141”), and SFAS 160, *“Noncontrolling Interests inConsolidated Financial Statements – an Amendment of ARB No. 51”*(“SFAS  160”).  SFAS 141(R) retains the fundamentalrequirements of SFAS 141, and broadens its scope by applying the acquisitionmethod to all transactions and other events in which one entity obtains controlover one or more other businesses, and requires, among other things,

 

·                  that assets acquired and liabilities assumed bemeasured at fair value as of the acquisition date,

 

·                  that liabilities related to contingent considerationbe recognized at the acquisition date and remeasured at fair value in eachsubsequent reporting period,

 

·                  that acquisition-related costs be expensed as incurred,and

 

·                  that income be recognized if the fair value of the netassets acquired exceeds the fair value of the consideration transferred.

 

SFAS 160 establishesaccounting and reporting standards for noncontrolling interests (i.e., minorityinterests) in a subsidiary, including changes in a parent’s ownership interestin a subsidiary and requires, among other things, that noncontrolling interestsin subsidiaries be classified as a separate component of equity.  Except for the presentation and disclosure requirementsof SFAS 160, which are to be applied retrospectively for all periods presented,SFAS 141 (R) and SFAS 160 are to be applied prospectively in financialstatements issued for fiscal years beginning after December 15, 2008.  We are assessing the impact SFAS 160 willhave on our consolidated financial statements.

 

**Cautionary Statement Relating toForward Looking Information**

 

We have included some forward-looking statements inthis section and other places in this report regarding our expectations.  These forward-looking statements involve knownand unknown risks, uncertainties and other factors which may cause our actualresults, levels of activity, performance or achievements, or industry results,to be materially different from any future results, levels of activity,performance or achievements expressed or implied by these forward-lookingstatements.  Some of theseforward-looking statements can be identified by the use of forward-lookingterminology including “believes,” “expects,” “may,” “will,” “should” or “anticipates”or the negative thereof or other variations thereon or comparable terminology,or by discussions of strategies that involve risks and uncertainties.  You should read statements that contain thesewords carefully because they

 

·                  discuss our future expectations;

 

·                  contain projections of our future operating results orof our future financial condition; or

 

·                  state other “forward-looking” information.

 

We believe it isimportant to discuss our expectations; however, it must be recognized thatevents may occur in the future over which we have no control and which we arenot accurately able to predict.  Readersare cautioned to consider the specific business risk factors described in thisreport and our Annual Report on Form 10-K and not to place undue relianceon the forward-looking statements contained in this report or our AnnualReport, which speak only as of the date of this report or the date of ourAnnual Report.  We undertake noobligation to publicly revise forward-looking statements to reflect events orcircumstances that may arise after the date of this report.

 

**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk.**

 

Management doesnot believe that there is any material market risk exposure with respect toderivative or 

 

21

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other financialinstruments that would require disclosure under this item.

 

**Item 4.  Controls andProcedures and Item 4T. Controls and Procedures.**

 

Our ChiefExecutive Officer and Chief Financial Officer are responsible primarily forestablishing and maintaining disclosure controls and procedures designed toensure that information required to be disclosed in our reports filed orsubmitted under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”) is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the U.S. Securities and ExchangeCommission.  These controls andprocedures are designed to ensure that information required to be disclosed inour reports filed or submitted under the Exchange Act is accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

 

Furthermore, ourChief Executive Officer and Chief Financial Officer are responsible for thedesign and supervision of our internal controls over financial reporting  that are then effected by and through our boardof directors, management and other personnel, to provide reasonable assuranceregarding the reliability of our financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.  Thesepolicies and procedures

 

·                                          pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of our assets,

 

·                                          provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat our receipts and expenditures are being made only in accordance withauthorizations of our management and directors; and

 

·                                          provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on our financial statements.

 

Our ChiefExecutive Officer and Chief Financial Officer, based upon their evaluation ofthe effectiveness of our disclosure controls and procedures and the internalcontrols over financial reporting as of the last day of the period covered bythis report, concluded that our disclosure controls and procedures and internalcontrols over financial reporting were fully effective as of the last day ofthe period covered by this report and reported to our auditors and board ofdirectors that no change occurred in our disclosure controls and procedures andinternal control over financial reporting occurred during the period covered bythis report that would materially affect or is reasonably likely to materiallyaffect our disclosure controls and procedures or internal control overfinancial reporting.  In conducting theirevaluation of our disclosure controls and procedures and internal controls overfinancial reporting, these executive officers did not discover any fraud thatinvolved management or other employees who have a significant role in ourdisclosure controls and procedures and internal controls over financialreporting.  Furthermore, there were nosignificant changes in our disclosure controls and procedures, internalcontrols over financial reporting, or other factors that could significantlyaffect our disclosure controls and procedures or internal controls overfinancial reporting subsequent to the date of their evaluation.  Because no significant deficiencies ormaterial weaknesses were discovered, no corrective actions were necessary ortaken to correct significant deficiencies and material weaknesses in ourinternal controls and disclosure controls and procedures.

 

**PART II.  OTHERINFORMATION**

 

**Item 1.  LegalProceedings**

 

We do not have anylegal proceedings to report.

 

**Item 1A.  Risk Factors**

 

There have been nomaterial changes from the risk factors previously disclosed in our 2007 AnnualReport 

 

22

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on Form 10-K.

 

**Item 2.  UnregisteredSales of Equity Securities and Use of Proceeds**

 

We do not have anything to report under this Item.

 

**Item 3.  Defaults UponSenior Securities**

 

We do not have anything to report under this Item.

 

**Item 4.  Submission ofMatters to a Vote of Security Holders**

 

We do not have anything to report under this Item.

 

**Item5.  Other Information**.

 

We do not have any thingto report under this Item.

 

**Item6.  Exhibits**

 

(a)  Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| 3.1.1                |       | Registrant’s 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.                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| 3.1.2                |       | Registrant’s First Amendment to Certificate of  Incorporation, incorporated by reference to Registrant’s Schedule 14  Information Statement filed with the U.S. Securities and Exchange Commission  on December 5, 2007.                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| 3.2                  |       | Registrant’s First  Amendment to the Certificate of Incorporation, dated December 27, 2007  and filed with the Secretary of State of the State of Oklahoma on  December 31, 2007, is incorporated by reference to the Schedule 14  Information Statement filed with the Commission on December 5, 2007. |
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| 3.3                  |       | Registrant’s Bylaws,  incorporated by reference to Exhibit 3.2 of Registrant’s Registration  Statement on Form SB-2 (No. 333-111819) as filed with the  Commission on January 9, 2004.                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| 4.1                  |       | Form of  Certificate of Common Stock of Registrant, incorporated by reference to  Exhibit 4.1 of Registrant’s Registration Statement on Form SB-2  (No. 333-111819) as filed with the Commission on January 9, 2004.                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| 4.2                  |       | Placement Agent  Agreement between Viewtrade Financial and Registrant, incorporated by  reference to Exhibit 4.2 of Registrant’s Registration Statement on  Form SB-2 (No. 333-111819) as filed with the Commission on  January 9, 2004.                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| 4.3                  |       | Placement Agent Warrant  Agreement between Viewtrade Financial and Registrant and form of Placement  Agent Warrant Certificate, incorporated by reference to Exhibit 4.3 of  Registrant’s Registration Statement on Form SB-2 (No. 333-111819)  as filed with the Commission on January 9, 2004.   |

 

23

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| 4.4    |   | Redeemable Warrant  Agreement between UMB Bank, N.A. and Registrant, incorporated by reference to  Exhibit 4.4 of Registrant’s Registration Statement on Form SB-2  (No. 333-111819) as filed with the Commission on January 9, 2004.                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.5    |   | Form of Redeemable  Warrant Certificate, incorporated by reference to Exhibit 4.5 of  Registrant’s Registration Statement on Form SB-2 (No. 333-111819)  as filed with the Commission on January 9, 2004.                                                   |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.6    |   | Financial Advisor  Agreement between Viewtrade Financial and Registrant, incorporated by  reference to Exhibit 4.6 of Registrant’s Registration Statement on  Form SB-2 (No. 333-111819) as filed with the Commission on  January 9, 2004.                       |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.7    |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.8    |   | Form of Senior  Promissory Note dated August 5, 2005, incorporated by reference to  Exhibit 4.1 of Form 8-K filed with the Commission on  August 11, 2005.                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.9    |   | 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.             |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.10   |   | 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.             |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.11   |   | Form of Senior  Promissory Note dated October 24, 2005, incorporated by reference to  Exhibit 4.1 of Form 8-K filed with the Commission on November 1,  2005.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.12   |   | 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.          |
|   |   |                                                                                                                                                                                                                                                                                      |
| 4.13   |   | 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   |   | Employment Agreement  between Registrant, ApothecaryRx, LLC and Lewis P. Zeidner, dated  January 2, 2008, is incorporated by reference to Registrant’s Schedule  14 Information Statement filed with the U.S. Securities and Exchange  Commission on December 5, 2007.     |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.2   |   | Employment Agreement  between Registrant, SDC Holdings, LLC and Vahid Salalati, dated  January 2, 2008, is incorporated by reference to Registrant’s Schedule  14 Information Statement filed with the U.S. Securities and Exchange  Commission on December 5, 2007.       |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.3   |   | Employment Agreement  between Registrant, SDC Holdings, LLC and Greg Luster, dated January 2,  2008, is incorporated by reference to Registrant’s Schedule 14 Information  Statement filed with the U.S. Securities and Exchange Commission on  December 5, 2007.          |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.4   |   | Registration Rights  Agreement between Registrant, Oliver Company Holdings, LLC,                                                                                                                                                                                                          |

 

24

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|   |   | Lewis P. Zeidner,  Stanton Nelson, Vahid Salalati, Greg Luster, William R. Oliver, Kevin Lewis,  John B. Frick Revocable Trust, Roger Ely, James A. Cox, Michael Gold, Katrina  J. Martin Revocable Trust, dated January 2, 2008, is incorporated by  reference to Registrant’s Schedule 14 Information Statement filed with the  U.S. Securities and Exchange Commission on December 5, 2007 is  incorporated by reference to Registrant’s Form 8-K filed with the U.S.  Securities and Exchange Commission on January 29, 2008. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.5   |   | Asset Purchase  Agreement among ApothecaryRx, LLC, Rambo Pharmacy, Inc. and Norman  Greenberg, dated January 3, 2008 is incorporated by reference to  Registrant’s Form 8-K filed with the U.S. Securities and Exchange  Commission on January 29, 2008.                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.6   |   | Goodwill Protection  Agreement among ApothecaryRx, LLC, Rambo Pharmacy, Inc. and Norman  Greenberg, dated January 12, 2008 is incorporated by reference to  Registrant’s Form 8-K filed with the U.S. Securities and Exchange  Commission on January 29, 2008.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7   |   | Employment Agreement  between ApothecaryRx, LLC and Aric Greenberg, dated January 17, 2008 is  incorporated by reference to Registrant’s Form 8-K filed with the U.S.  Securities and Exchange Commission on January 29, 2008.                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8   |   | Transition Agreement  among ApothecaryRx, LLC, Rambo Pharmacy, Inc. and Norman Greenberg,  dated January 17, 2008 is incorporated by reference to Registrant’s  Form 8-K filed with the U.S. Securities and Exchange Commission on  January 29, 2008.                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9   |   | Lease Agreement between  ApothecaryRx, LLC and Rambo Pharmacy, Inc., dated January 12, 2008  is incorporated by reference to Registrant’s Form 8-K filed with the  U.S. Securities and Exchange Commission on January 29, 2008.                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10  |   | Asset Purchase  Agreement between ApothecaryRx, LLC and Thrifty Drug Stores, Inc., dated  February 8, 2008 is incorporated by reference to Registrant’s  Form 8-K filed with the U.S. Securities and Exchange Commission on  March 6, 2008.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11  |   | Goodwill Protection  Agreement among ApothecaryRx, LLC and Thrifty Drug Stores, Inc., dated  February 29, 2008 is incorporated by reference to Registrant’s  Form 8-K filed with the U.S. Securities and Exchange Commission on  March 6, 2008.                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of  Stanton Nelson, Chief Executive Officer of Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Mark  R. Kidd, 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 Mark R. Kidd, Chief Financial Officer and  Controller of Registrant.                                                                                                                                                                                                                                                                                                                                                          |

 

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** **

**SIGNATURES**

 

In accordance withthe Exchange Act, the Registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized

 
|                   | GRAYMARK HEALTHCARE,  INC.              |
|------------------------|-----------------------------------------|
|                   | (Registrant)                            |
|                   |                                    |   |
|                   | By:                                     |  /S/STANTON NELSON |
|                   | Stanton  Nelson                         |
|                   | Chief  Executive Officer                |
| Date: May 6, 2008 |                                    |
|                   | By:                                     |  /S/MARK R. KIDD |
|                   | Mark  R. Kidd                           |
|                   | Chief  Financial Officer and Controller |
| Date: May 6, 2008 |                                    |

 

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