##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
 Commission File Number: 001-34171
 GRAYMARK HEALTHCARE, INC.
  OKLAHOMA
(State or other jurisdiction of 
incorporation or organization)
    
    20-0180812
(I.R.S. Employer
Identification No.)
 210 Park Avenue, Ste. 1350
Oklahoma City, Oklahoma 73102
 (405) 601-5300
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



##### 



GRAYMARK HEALTHCARE, INC
  Part I. Financial InformationItem 1. Consolidated Condensed Financial Statements (Unaudited)
    
    
    1a) Balance Sheets
    
    
    2b) Statements of Operations
    
    
    3d) Statements of Cash Flows
    
    
    4e) Notes to Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30Part II. Other InformationItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. (Removed and Reserved)
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32SIGNATURES
    
    
    33EX-31.1EX-31.2EX-31.3EX-32.1EX-32.2EX-32.3
      i




---



##### Table of Contents



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




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Balance Sheets
 (Unaudited)
 March 31,
    
    
    December 31,2011
    
    
    2010ASSETSCash and cash equivalents
    
    $
    574,054
    
    
    $
    878,796Cash and cash equivalents from discontinued operations
    
    
    17,898
    
    
    
    692,261Accounts receivable, net of allowances for contractual adjustments and
doubtful accounts of $2,433,914 and $2,791,906, respectively
    
    
    2,942,103
    
    
    
    2,892,271Inventories
    
    
    584,700
    
    
    
    553,342Current assets from discontinued operations
    
    
    1,313,574
    
    
    
    2,093,571Other current assets
    
    
    415,167
    
    
    
    468,486Total current assets
    
    
    5,847,496
    
    
    
    7,578,727Property and equipment, net
    
    
    3,662,648
    
    
    
    3,870,514Intangible assets, net
    
    
    2,362,508
    
    
    
    2,400,756Goodwill
    
    
    13,007,953
    
    
    
    13,007,953Other assets from discontinued operations
    
    
    1,087,614
    
    
    
    1,101,013Other assets
    
    
    834,546
    
    
    
    733,589Total assets
    
    $
    26,802,765
    
    
    $
    28,692,552LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    1,223,139
    
    
    $
    942,020Accrued liabilities
    
    
    1,726,148
    
    
    
    2,357,195Short-term debt
    
    
    734,683
    
    
    
    12,075Current portion of long-term debt
    
    
    22,732,720
    
    
    
    22,756,706Current liabilities from discontinued operations
    
    
    1,750,092
    
    
    
    2,015,277Total current liabilities
    
    
    28,166,782
    
    
    
    28,083,273Long-term debt, net of current portion
    
    
    360,808
    
    
    
    436,850Total liabilities
    
    
    28,527,590
    
    
    
    28,520,123Equity:Graymark Healthcare shareholders equity:Preferred stock $0.0001 par value, 10,000,000
authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock $0.0001 par value, 500,000,000 shares authorized;
28,953,611 issued and outstanding
    
    
    2,895
    
    
    
    2,895Paid-in capital
    
    
    29,543,103
    
    
    
    29,519,387Accumulated deficit
    
    
    (31,055,243
    )
    
    
    (29,218,977
    )Total Graymark Healthcare shareholders equity (deficit)
    
    
    (1,509,245
    )
    
    
    303,305Noncontrolling interest
    
    
    (215,580
    )
    
    
    (130,876
    )Total equity (deficit)
    
    
    (1,724,825
    )
    
    
    172,429Total liabilities and shareholders equity
    
    $
    26,802,765
    
    
    $
    28,692,552
   2




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
 For the Three Months Ended March 31, 2011 and 2010
 (Unaudited)
 2011
    
    
    2010Net Revenues:Services
    
    $
    3,443,496
    
    
    $
    4,672,985Product sales
    
    
    1,246,377
    
    
    
    1,239,0504,689,873
    
    
    
    5,912,035Cost of Services and Sales:Cost of services
    
    
    1,222,944
    
    
    
    1,452,600Cost of sales
    
    
    408,696
    
    
    
    400,3351,631,640
    
    
    
    1,852,935Gross Margin
    
    
    3,058,233
    
    
    
    4,059,100Operating Expenses:Selling, general and administrative
    
    
    3,992,736
    
    
    
    4,892,600Bad debt expense
    
    
    117,847
    
    
    
    238,899Depreciation and amortization
    
    
    294,628
    
    
    
    344,3994,405,211
    
    
    
    5,475,898Other (Expense):Interest expense, net
    
    
    (347,482
    )
    
    
    (284,231
    )Other expense
    
    
    (2,229
    )
    
    
    Net other (expense)
    
    
    (349,711
    )
    
    
    (284,231
    )Income (loss) from continuing operations, before taxes
    
    
    (1,696,689
    )
    
    
    (1,701,029
    )Provision for income taxes
    
    
    (9,603
    )
    
    
    (47,986
    )Income (loss) from continuing operations, net of taxes
    
    
    (1,706,292
    )
    
    
    (1,749,015
    )Income (loss) from discontinued operations, net of taxes
    
    
    (214,678
    )
    
    
    283,267Net income (loss)
    
    
    (1,920,970
    )
    
    
    (1,465,748
    )Less: Net income (loss) attributable to noncontrolling interests
    
    
    (84,704
    )
    
    
    (40,799
    )Net income (loss) attributable to Graymark Healthcare
    
    $
    (1,836,266
    )
    
    $
    (1,424,949
    )Earnings per common share (basic and diluted):Net income (loss) from continuing operations
    
    $
    (0.06
    )
    
    $
    (0.06
    )Income from discontinued operations
    
    
    (0.01
    )
    
    
    0.01Net income (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.05
    )Weighted average number of common shares outstanding
    
    
    28,953,611
    
    
    
    29,011,675Weighted average number of diluted shares outstanding
    
    
    28,953,611
    
    
    
    29,011,675
   3




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Cash Flows
 For the Three Months Ended March 31, 2011 and 2010
 (Unaudited)
 2011
    
    
    2010Operating activities:Net income (loss)
    
    $
    (1,836,266
    )
    
    $
    (1,424,949
    )Less: Net income (loss) from discontinued operations
    
    
    (214,678
    )
    
    
    283,267Net income(loss) from continuing operations
    
    
    (1,621,588
    )
    
    
    (1,708,216
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    294,628
    
    
    
    344,399Noncontrolling interests
    
    
    (84,704
    )
    
    
    (40,799
    )Stock-based compensation, net of cashless vesting
    
    
    23,716
    
    
    
    307,044Bad debt expense
    
    
    117,847
    
    
    
    238,899Changes in assets and liabilities Accounts receivable
    
    
    (167,679
    )
    
    
    (60,423
    )Inventories
    
    
    (31,358
    )
    
    
    (42,558
    )Other assets
    
    
    (47,638
    )
    
    
    (132,095
    )Accounts payable
    
    
    281,119
    
    
    
    486,175Accrued liabilities
    
    
    (631,047
    )
    
    
    (140,227
    )Net cash (used in) operating activities from continuing operations
    
    
    (1,866,704
    )
    
    
    (747,801
    )Net cash provided by operating activities from discontinued operations
    
    
    313,533
    
    
    
    1,220,356Net cash provided by (used in) operating activities
    
    
    (1,553,171
    )
    
    
    472,556Investing activities:Purchase of property and equipment
    
    
    (51,943
    )
    
    
    (67,124
    )Disposal of property and equipment
    
    
    3,429
    
    
    
    8,910Net cash (used in) investing activities from continuing operations
    
    
    (48,514
    )
    
    
    (58,214
    )Net cash (used in) investing activities from discontinued operations
    
    
    
    
    
    
    (29,164
    )Net cash (used in) investing activities
    
    
    (48,514
    )
    
    
    (87,378
    )Financing activities:Debt proceeds
    
    
    725,000
    
    
    
    12,614Debt payments
    
    
    (102,420
    )
    
    
    (179,537
    )Net cash provided by (used in) financing activities from continuing operations
    
    
    622,580
    
    
    
    (166,923
    )Net cash (used in) financing activities from discontinued operations
    
    
    
    
    
    
    (758,639
    )Net cash provided by (used in) financing activities
    
    
    622,580
    
    
    
    (925,562
    )Net change in cash and cash equivalents
    
    
    (979,105
    )
    
    
    (540,385
    )Cash and cash equivalents at beginning of period
    
    
    1,571,057
    
    
    
    1,890,606Cash and cash equivalents at end of period
    
    
    591,952
    
    
    
    1,350,221Cash and cash equivalents of discontinued operations at end of period
    
    
    17,898
    
    
    
    789,475Cash and cash equivalents of continuing operations at end of period
    
    $
    574,054
    
    
    $
    560,746Cash Paid for Interest and Income Taxes:Interest expense, continuing operations
    
    $
    355,000
    
    
    $
    290,000Interest expense, discontinued operations
    
    $
    1,000
    
    
    $
    346,000Income taxes
    
    $
    9,000
    
    
    $
    38,000
   4




---



##### Table of Contents



GRAYMARK HEALTHCARE, INC.
 
 Notes to Consolidated Condensed Financial Statements
 For the Periods Ended March 31, 2011 and 2010
        5




---



##### Table of Contents



Interim Financial Information
 Reclassifications
 Consolidation
 Use of estimates
 Revenue recognition 
   6




---



##### Table of Contents



Cost of Services and Sales
 Restricted cash
 Accounts receivable
   7




---



##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010Allowance for contractual adjustments
    
    $
    1,419,291
    
    
    $
    1,676,618Allowance for doubtful accounts
    
    
    1,014,623
    
    
    
    1,115,288Total
    
    $
    2,433,914
    
    
    $
    2,791,906
  Contractual
    
    
    DoubtfulAdjustments
    
    
    Accounts
    
    
    TotalBalance at December 31, 2010
    
    $
    1,676,618
    
    
    $
    1,115,288
    
    
    $
    2,791,906Provisions
    
    
    1,050,222
    
    
    
    117,847
    
    
    
    1,168,069Write-offs, net of recoveries
    
    
    (1,307,549
    )
    
    
    (218,512
    )
    
    
    (1,526,061
    )Balance at March 31, 2011
    
    $
    1,419,291
    
    
    $
    1,014,623
    
    
    $
    2,433,914
  8




---



##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    20101 to 60 days
    
    $
    1,942,865
    
    
    $
    1,890,90261 to 90 days
    
    
    271,056
    
    
    
    282,80791 to 120 days
    
    
    190,514
    
    
    
    170,435121 to 180 days
    
    
    187,027
    
    
    
    67,394181 to 360 days
    
    
    160,597
    
    
    
    186,310Greater than 360 days
    
    
    190,044
    
    
    
    294,423Total
    
    $
    2,942,103
    
    
    $
    2,892,271
   Goodwill and Intangible Assets
  Earnings (loss) per share
 Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
   9




---



##### Table of Contents



10




---



##### Table of Contents



2011
    
    
    2010Revenues
    
    $
    
    
    
    $
    21,693,439Income (loss) before taxes  ApothecaryRx
    
    $
    (206,966
    )
    
    $
    285,157Income (loss) before taxes  other
    
    
    (7,712
    )
    
    
    (1,890
    )Income tax (provision)
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    $
    (214,678
    )
    
    $
    283,267
  March 31,
    
    
    December 31,2011
    
    
    2010Cash and cash equivalents
    
    $
    17,898
    
    
    $
    692,261Accounts receivable, net of allowances
    
    
    34,247
    
    
    
    675,501Inventories
    
    
    68,438
    
    
    
    68,267Indemnity Escrow Fund
    
    
    1,000,000
    
    
    
    1,000,000Other current assets
    
    
    210,889
    
    
    
    349,803Total current assets
    
    
    1,331,472
    
    
    
    2,785,832Fixed assets, net
    
    
    87,614
    
    
    
    101,013Indemnity Escrow Fund
    
    
    1,000,000
    
    
    
    1,000,000Total noncurrent assets
    
    
    1,087,614
    
    
    
    1,101,013Total assets
    
    $
    2,419,086
    
    
    $
    3,886,845Payables and accrued liabilities
    
    $
    1,750,092
    
    
    $
    2,015,277
   March 31,
    
    
    December 31,2011
    
    
    2010Gross amount
    
    $
    20,516,894
    
    
    $
    20,516,894Accumulated impairment losses
    
    
    (7,508,941
    )
    
    
    (7,508,941
    )Carrying value
    
    $
    13,007,953
    
    
    $
    13,007,953
   11




---



##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010Gross amount
    
    $
    6,076,000
    
    
    $
    6,076,000Accumulated impairment losses
    
    
    (3,243,056
    )
    
    
    (3,243,056
    )Carrying value
    
    $
    2,832,944
    
    
    $
    2,832,944
  Useful
    
    March 31, 2011
    
    
    December 31,Life
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    2010(Years)
    
    Value
    
    
    Amortization
    
    
    Net
    
    
    NetCustomer relationships
    
    Indefinite
    
    $
    1,046,000
    
    
    $
    
    
    
    $
    1,046,000
    
    
    $
    1,046,000Customer relationships
    
    8  15
    
    
    1,139,333
    
    
    
    (253,408
    )
    
    
    885,925
    
    
    
    908,000Trademark
    
    10  15
    
    
    229,611
    
    
    
    (43,602
    )
    
    
    186,009
    
    
    
    191,533Covenants not to compete
    
    3  15
    
    
    228,000
    
    
    
    (153,371
    )
    
    
    74,629
    
    
    
    82,111Payor contracts
    
    15
    
    
    190,000
    
    
    
    (20,055
    )
    
    
    169,945
    
    
    
    173,112Total
    
    
    
    $
    2,832,944
    
    
    $
    (470,436
    )
    
    $
    2,362,508
    
    
    $
    2,400,756
  Twelve months ended March 31,2012
    
    $
    157,0002013
    
    
    142,0002014
    
    
    132,0002015
    
    
    132,0002016
    
    
    125,000
   Maturity
    
    March 31,
    
    
    December 31,Rate (1)
    
    Date
    
    2011
    
    
    2010Senior bank debt
    
    6%
    
    May 2014
    
    $
    8,000,000
    
    
    $
    8,000,000Bank line of credit
    
    6%
    
    Aug. 2015
    
    
    14,396,935
    
    
    
    14,396,935Notes payable on equipment
    
    6  14%
    
    April 2012  Dec. 2013
    
    
    381,412
    
    
    
    417,249Sleep center notes payable
    
    3.75  8.75%
    
    July 2011  Jan. 2015
    
    
    179,319
    
    
    
    225,124Seller financing
    
    7.65%
    
    Sept. 2012
    
    
    78,414
    
    
    
    90,662Notes payable on vehicles
    
    7.5%
    
    Nov. 2012  Dec. 2013
    
    
    57,447
    
    
    
    63,586Total borrowings
    
    
    
    
    
    
    23,093,528
    
    
    
    23,193,556Less: Current portion of long-term debt
    
    
    
    
    
    
    (22,732,720
    )
    
    
    (22,756,706
    )Long-term debt
    
    
    
    
    
    $
    360,808
    
    
    $
    436,850
 
 (1)
    
    Effective rate as of March 31, 2011
  12




---



##### Table of Contents



Maturity
    
    
    March 31,
    
    
    December 31,Rate (1)
    
    
    Date
    
    
    2011
    
    
    2010Note payable
    
    
    6
    %
    
    Aug. 2011
    
    $
    725,000
    
    
    $
    Insurance premium financing
    
    
    2.97
    %
    
    Nov. 2011
    
    
    9,683
    
    
    
    12,075Short-term debt
    
    
    
    
    
    
    
    
    
    $
    734,683
    
    
    $
    12,075
 
 (1)
    
    Effective rate as of March 31, 2011
  Twelve months ended March 31,2012
    
    $
    22,733,0002013
    
    
    213,0002014
    
    
    129,0002015
    
    
    19,0002016
    
    
    Thereafter
    
    
    
    13




---



##### Table of Contents




    
    On or before June 30, 2011, the Company will pay to Arvest Bank the greater of
$3 million or one-third of the proceeds of any public equity offering (the Company made
a $3 million payment to Arvest on May 12, 2011);
 
    
    On or before June 30, 2011, the Company will pay Arvest Bank a fee equal to
0.25% of the outstanding loan balance as of June 30, 2011;
 
    
    If the Company is not in compliance with the debt service coverage ratio and
minimum net worth covenants on December 31, 2011, the Company will pay Arvest Bank a
fee equal to 0.50% of the then outstanding balance of the loan (which does not cure any
default in such covenants);
 
    
    On June 30, 2011, the Company will prepay all interest and principal payments
due to Arvest Bank between July 1, 2011 and December 31, 2011;
 
    
    On June 30, 2011, if the Company has received at least $15 million in proceeds
from a public equity offering then the Company will escrow with Arvest all principal
and interest payments due to Arvest between January 1, 2012 and June 30, 2012;
 
    
    The Company may not repay any amounts on the Valiant Note before August 1, 2011
except that the Company may repay such loan in full if the Company has received more
than $10 million in proceeds from a public equity offering and if the Company has
received less than $10 million from a public equity offering then the Company will be
permitted to make interest payments only on such loan; and
 
    
    The $1 million Valiant Note is subordinated to Arvest Banks credit facility in
all respects.
  Legal Issues:
  Recurring Fair Value Measurements:
  14




---



##### Table of Contents



15




---



##### Table of Contents



2011
    
    
    2010Revenues
    
    $
    485,892
    
    
    $
    585,609Income (loss), before taxes
    
    $
    63,706
    
    
    $
    182,979
  March 31,
    
    
    December 31,2011
    
    
    2010Cash and cash equivalents
    
    $
    81,392
    
    
    $
    239,141Accounts receivable, net of allowances
    
    
    527,198
    
    
    
    294,423Other current assets
    
    
    21,159
    
    
    
    30,171Total current assets
    
    
    629,749
    
    
    
    563,735Fixed assets, net
    
    
    271,665
    
    
    
    227,667Intangible assets, net
    
    
    1,085,685
    
    
    
    1,087,000Goodwill
    
    
    163,730
    
    
    
    163,730Total noncurrent assets
    
    
    1,521,080
    
    
    
    1,478,397Total assets
    
    $
    2,150,829
    
    
    $
    2,042,133Payables and accrued liabilities
    
    $
    179,305
    
    
    $
    125,325
   16




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
     
    
    Referral:Our medical directors, who are board-certified physicians in sleep
medicine, have forged strong relationships with referral sources, which include primary
care physicians, as well as physicians from a wide variety of other specialties and
dentists.
 
    
    Diagnosis:We own and operate sleep testing clinics that diagnose the full
range of sleep disorders including OSA, insomnia, narcolepsy and restless legs
syndrome.
 
    
    CPAP Device Supply:We sell CPAP devices, which are used to treat OSA.
 
    
    Re-Supply:We offer a re-supply program for our patients and other CPAP users
to obtain the required components for their CPAP devices that must be replaced on a
regular basis.
 
    
    Care Management:We provide continuing care to our patients led by our medical
directors who are board-certified physicians in sleep medicine and their staff.
   17




---



##### Table of Contents



Private Placement Offering and Sale of Nocturna East, Inc.
   Going Concern
   Discontinued Operations
   18




---



##### Table of Contents



Results of Operations
  Comparison of the Three Month Periods Ended March 31, 2011 and 2010
 For the Three Months EndedMarch 31,2011
    
    
    2010Net Revenues:Services
    
    $
    3,443,496
    
    
    $
    4,672,985Product sales
    
    
    1,246,377
    
    
    
    1,239,0504,689,873
    
    
    
    5,912,035Cost of services
    
    
    1,222,944
    
    
    
    1,452,600Cost of sales
    
    
    408,696
    
    
    
    400,335Selling, general and administrative
    
    
    3,992,736
    
    
    
    4,892,600Bad debt expense
    
    
    117,847
    
    
    
    238,899Depreciation and amortization
    
    
    294,628
    
    
    
    344,399Net other expense
    
    
    349,711
    
    
    
    284,231Loss from continuing
operations, before taxes
    
    
    (1,696,689
    )
    
    
    (1,701,029
    )Provision for income taxes
    
    
    (9,603
    )
    
    
    (47,986
    )Loss from continuing
operations, net of taxes
    
    
    (1,706,292
    )
    
    
    (1,749,015
    )Discontinued operations, net of taxes
    
    
    (214,678
    )
    
    
    283,267Net loss
    
    
    (1,920,970
    )
    
    
    (1,465,748
    )Less: Noncontrolling interests
    
    
    (84,704
    )
    
    
    (40,799
    )Net loss
attributable to Graymark Healthcare
    
    $
    (1,836,266
    )
    
    $
    (1,424,949
    )
  19




---



##### Table of Contents



Discussion of Three Month Periods Ended March 31, 2011 and 2010
 Services revenues
 
    
    $0.5 million due to lower volumes;
    
    $0.5 million due to lower average revenue per sleep study performed;
 
    
    $0.1 million related to a reduction in the monthly management fee related to
our Management Services Agreement (MSA); and
 
    
    $0.1 million due to lower revenues in our clinic operations.
  Product revenues
  Cost of services
  Cost of sales
  Selling, general and administrative
 
    
    a decrease in operating expenses in our sleep diagnostic business of $0.7
million compared to the first quarter of 2010 primarily due to the implementation of
several cost reduction initiatives including staff reductions, renegotiating of
facility leases and consolidation of non-profitable facilities during the last three
quarters of 2010 and the first quarter of 2011.
 
    
    an increase in operating expense in our sleep therapy business of $0.3 million
as we expanded our
infrastructure in order to gain operating efficiencies and prepare for continued growth
in this business unit; and
 
    
    a decrease in overhead incurred at the parent-company level due to decreased
stock option expense of $0.3 million and $0.2 million related to reductions in
executive labor expenses due to staff reductions.
  20




---



##### Table of Contents



Depreciation and amortization
 Bad debt expense .
 Net other expense
 Income from discontinued operations
 2011
    
    
    2010Revenues
    
    $
    
    
    
    $
    21,693,439Income (loss) before taxes  ApothecaryRx
    
    $
    (206,966
    )
    
    $
    285,157Income (loss) before taxes  other
    
    
    (7,712
    )
    
    
    (1,890
    )Income tax (provision)
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    $
    (214,678
    )
    
    $
    283,267
  Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
 Liquidity and Capital Resources
   21




---



##### Table of Contents



22




---



##### Table of Contents



Arvest Credit Facility
  Personal Guaranties.
   23




---



##### Table of Contents



Maturity Dates.
 Tranche
    
    Amount
    
    
    Maturity Date#1
    
    $
    1,054,831
    
    
    
    6/1/2014#2
    
    
    5,217,241
    
    
    
    7/1/2014#3
    
    
    1,536,600
    
    
    
    7/1/2014#4
    
    
    1,490,739
    
    
    
    7/1/2014#5
    
    
    177,353
    
    
    
    12/1/2014#6
    
    
    4,920,171
    
    
    
    8/1/2015Total
    
    $
    14,396,935
 Interest Rate. The Wall
Street Journal
 Interest and Principal Payments.
  Use of Proceeds.
  Collateral.
  24




---



##### Table of Contents



Debt Service Coverage Ratio.
 
    
    the net income of Graymark Healthcare (i) increased (to the extent deducted in
determining net income) by the sum, without duplication, of our interest expense,
amortization, depreciation, and non-recurring expenses as approved by Arvest, and (ii)
decreased (to the extent included in determining net income and without duplication) by
the amount of minority interest share of net income and distributions to minority
interests for taxes, if any, to
 
    
    the annual debt service including interest expense and current maturities of
indebtedness as determined in accordance with generally accepted accounting principles.
  Compliance with Financial Covenants.
 Default and Remedies.
 Deposit Account Control Agreement.
 Loan Agreement
   25




---



##### Table of Contents




    
    On or before June 30, 2011, Graymark will pay to Arvest the greater of $3
million or one-third of the proceeds of any public equity offering (we made a $3
million payment to Arvest on May 12, 2011);
 
    
    On or before June 30, 2011, Graymark will pay Arvest a fee equal to 0.25% of
the outstanding loan balance as of June 30, 2011;
 
    
    If Graymark is not in compliance with the debt service coverage ratio and
minimum net worth covenants on December 31, 2011, Graymark will pay Arvest a fee equal
to 0.50% of the then outstanding balance of the loan (which does not cure any default
in such covenants);
 
    
    On June 30, 2011, Graymark will prepay all interest and principal payments due
to Arvest between July 1, 2011 and December 31, 2011;
 
    
    On June 30, 2011, if Graymark has received at least $15 million in proceeds
from a public equity offering then Graymark will escrow with Arvest all principal and
interest payments due to Arvest between January 1, 2012 and June 30, 2012;
 
    
    Graymark may not repay any amounts on the $1 million loan from Valiant
Investments before August 1, 2011 except that Graymark may repay such loan in full if
Graymark has received more than $10 million in proceeds from a public equity offering
and if Graymark has received less than $10 million from a public equity offering then
Graymark will be permitted to make interest payments only on such loan; and
 
    
    The $1 million Valiant Investments loan is subordinated to Arvests credit
facility in all respects.
 Financial Commitments
  < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years
    
    
    TotalShort-term debt
    
    $
    734,683
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    734,683Long-term debt (1)
    
    
    23,863,772
    
    
    
    369,789
    
    
    
    18,771
    
    
    
    
    
    
    
    24,252,332Operating leases
    
    
    1,241,424
    
    
    
    2,019,384
    
    
    
    993,689
    
    
    
    2,324,102
    
    
    
    6,578,599Operating leases, discontinued operations
    
    
    270,911
    
    
    
    380,508
    
    
    
    41,572
    
    
    
    
    
    
    
    692,991$
    26,110,790
    
    
    $
    2,769,681
    
    
    $
    1,054,032
    
    
    $
    2,324,102
    
    
    $
    32,258,605
 
 (1)
    
    Includes principal and interest obligations.
    26




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  Revenue recognition 
      27




---



##### Table of Contents



Cost of Services and Sales
 Accounts Receivable
      28




---



##### Table of Contents



March 31, 2011
    
    
    December 31, 2010Actual
    
    
    Expected
    
    
    Actual
    
    
    ExpectedSleep diagnostic business
    
    
    47.06
    
    
    
    45 to 50
    
    
    
    48.62
    
    
    
    50 to 55Sleep therapy business
    
    
    64.26
    
    
    
    55 to 60
    
    
    
    51.30
    
    
    
    55 to 60
  Goodwill and Intangible Assets
  Recently Adopted and Recently Issued Accounting Guidance
 Adopted Guidance
    29




---



##### Table of Contents



Cautionary Statement Relating to Forward Looking Information
  
    
    discuss our future expectations;
    
    contain projections of our future operating results or of our future financial condition; or
    
    state other forward-looking information.
  
 Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4.
    
    Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   30




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  Material Weakness
 Internal Controls over Financial Reporting
    
 PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
  
 Item 1A.
    
    Risk Factors.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
 Unregistered Sales of Equity Securities
  Repurchases of Equity Securities
   31




---



##### Table of Contents



Item 3.
    
    Defaults Upon Senior Securities.
  
 Item 4.
    
    (Removed and Reserved).
 
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits.
  Exhibit No.

    
    Description10.1
    
    
    Loan Agreement dated March 16, 2011 by and between Valiant Investments LLC and
Graymark Healthcare, Inc., is incorporated by reference to Exhibit 10.1 to the
Registrants Current Report with the U.S. Securities and Exchange Commission on Form
8-K filed on March 22, 2011.10.2
    
    
    Note dated March 16, 2011 issued by Graymark Healthcare, Inc., is incorporated
by reference to Exhibit 10.2 to the Registrants Current Report with the U.S.
Securities and Exchange Commission on Form 8-K filed on March 22, 2011.10.3
    
    
    Subordination Agreement dated March 16, 2011 by and among Valiant Investments,
L.L.C., ApothecaryRX, LLC, SDC Holdings LLC and Graymark Healthcare, Inc., in favor of
Arvest Bank, is incorporated by reference to Exhibit 10.3 to the Registrants Current
Report with the U.S. Securities and Exchange Commission on Form 8-K filed on March 22,
2011.10.4
    
    
    Letter Agreement dated March 11, 2011 by and between Graymark Healthcare, Inc.
and Arvest Bank, is incorporated by reference to Exhibit 99.1 to the Registrants
Current Report with the U.S. Securities and Exchange Commission on Form 8-K filed on
March 22, 2011.10.5
    
    
    Form of Subscription Agreement dated April 30, 2011 by and between each of
Graymark Healthcare, Inc., and each of MTV Investments, LP, Black Oak II, LLC, TLW
Securities, LLC and Valiant Investments, LLC, is incorporated by reference to Exhibit
10.1 to the Registrants Current Report with the U.S. Securities and Exchange
Commission on Form 8-K filed on May 5, 2011.10.6
    
    
    Form of Warrant Agreement dated May 4, 2011 issued to each of MTV Investments,
LP, Black Oak II, LLC, TLW Securities, LLC and Valiant Investments, LLC, is
incorporated by reference to Exhibit 10.2 to the Registrants Current Report with the
U.S. Securities and Exchange Commission on Form 8-K filed on May 5, 2011.31.1
    
    
    Certification of Stanton Nelson, Chief Executive Officer of Registrant
(furnished herewith).31.2
    
    
    Certification of Edward M. Carriero, Jr., Chief Financial Officer of Registrant
(furnished herewith).31.3
    
    
    Certification of Grant A. Christianson, Chief Accounting Officer of Registrant
(furnished herewith).32.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Stanton Nelson, Chief Executive Officer of
Registrant (furnished herewith).32.2
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Edward M. Carriero, Jr., Chief Financial
Officer of Registrant (furnished herewith).32.3
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Grant A. Christianson, Chief Accounting
Officer of Registrant (furnished herewith).
  32




---



##### Table of Contents



SIGNATURES
  GRAYMARK HEALTHCARE, INC.
(Registrant)By:
    /S/      STANTON NELSONStanton NelsonChief Executive Officer
(Principal Executive Officer)Date:  May 16, 2011
    By:
    /S/      EDWARD M. CARRIERO, JR.Edward M. Carriero, Jr.Chief Financial Officer
(Principal Financial Officer)Date:  May 16, 2011
    By:
    /S/      GRANT A. CHRISTIANSONGrant A. ChristiansonChief Accounting Officer
(Principal Accounting Officer)   33