Foundation Healthcare (FDNH) 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2008

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: 000-50638

GRAYMARK HEALTHCARE, INC.

(Exact name of registrant as specified 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)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-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 registrant is 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 of the registrant’s common stock, $.0001 par value, were outstanding.

GRAYMARK HEALTHCARE, 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 STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements under the captions and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 1A. Risk Factors,” and elsewhere in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “expects,” “may,” “will,” or “should” or other variations thereon, or by discussions of strategies that involve risks and uncertainties.  Our actual results or industry results may be materially different from any future results expressed or implied by such forward-looking statements.  Factors that could cause actual results to differ materially include general economic and business conditions; our ability to implement our business strategies; competition; availability of key personnel; increasing operating costs; unsuccessful promotional efforts; changes in brand awareness; acceptance of new product offerings; and changes in, or the failure to comply with, and government regulations.

Throughout this report the first personal plural pronoun in the nominative case form “we” and its objective 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 its subsidiaries, including SDC Holdings LLC and ApothecaryRx LLC, and their executive officers and directors.

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PART I.  FINANCIAL INFORMATION

Item 1.  Graymark Healthcare, Inc. Consolidated Condensed Financial Statements

The consolidated condensed financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission.  The Consolidated Condensed Balance Sheets as of March 31, 2008 and December 31, 2007, the Consolidated Condensed Statements of Operations for the three months ended March 31, 2008 and 2007, and the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2008 and 2007, have been prepared without audit.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.

In the opinion management, the consolidated condensed statements for the unaudited interim periods presented 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 and other factors on our operations, net earnings for any interim period may not be comparable to the same interim period in previous years, nor necessarily indicative of earnings for the full year.

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GRAYMARK HEALTHCARE, 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 to Consolidated Condensed Financial Statements

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GRAYMARK HEALTHCARE, INC.

Consolidated Condensed Statements of Operations

For the Three 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 to Consolidated Condensed Financial Statements

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GRAYMARK HEALTHCARE, INC.

Consolidated Condensed Statements of Cash Flows

For the Three 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 to Consolidated Condensed Financial Statements

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GRAYMARK HEALTHCARE, INC.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2008 and 2007

Note 1 – Nature of Business

Graymark Healthcare, Inc. (the “Company”) is organized in Oklahoma.  Prior to December 31, 2007, the Company was named Graymark Productions, Inc. and was an independent producer and distributor of film entertainment content.  On December 31, 2007, the Company completed the acquisition of ApothecaryRx, LLC, (“ApothecaryRx”) and SDC Holdings, LLC (“SDC Holdings”), collectively referred to as the “Graymark Acquisiton.”  For financial reporting purposes, ApothecaryRx and SDC Holding were considered the acquiring entities and historical financial statements prior to December 31, 2007 reflect the activities of ApothecaryRx and SDC Holdings as adjusted for the effect of the recapitalization 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 historical financial statements as Graymark Production was considered to be the acquired entity.  In conjunction with the Graymark Acquisition, the Company suspended all operations related to its film production activities.  The Company will continue to actively distribute the motion picture projects that it previously completed.

Note 2 – 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 condensed financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim financial statements and with Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, 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 the year ended December 31, 2008.  The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2007.  The December 31, 2007 consolidated condensed balance sheet was derived from audited financial statements.

Consolidation – The accompanying consolidated financial statements include the accounts of the Company and its wholly owned, majority owned and controlled subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

Revenue recognition –

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

Sleep center services and product sales from the Company’s SDC operating segment are recognized in the period in which services and related products are provided to customers and are

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recorded at net realizable amounts estimated to be paid by customers and third-party payers.  Insurance benefits are assigned to the Company and, accordingly, the Company bills on behalf of its customers.  The Company has established an allowance to account for sales adjustments that result from differences between the amount billed and the expected realizable amount.  Actual adjustments that result from differences between the payment amount received and the expected realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash application or when otherwise determined pursuant to the Company’s collection procedures.  Revenues in the accompanying consolidated financial statements are reported net of such adjustments.

Due to the nature of the healthcare industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable values at the time products and/or services are provided.  Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available.  Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded.

Included in accounts receivable are earned but unbilled receivables.  Unbilled accounts receivable represent charges for services delivered to customers for which invoices have not yet been generated by the billing system.  Prior to the delivery of services or equipment and supplies to customers, we perform certain certification and approval procedures to ensure collection is reasonably assured and that unbilled accounts receivable are recorded at net amounts expected to be paid by customers and third-party payers.  Billing delays, ranging from several weeks to several months, can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources, interim transactions occurring between cycle billing dates established for each customer within the billing system and new sleep labs awaiting assignment of new provider enrollment identification numbers.  In the event that a third-party payer does not accept the claim for payment, the customer is ultimately responsible.

We perform analysis to evaluate the net realizable value of accounts receivable on a quarterly basis.  Specifically, we consider historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions.  Because of continuing changes in the health care industry and third-party reimbursement, it is possible that our estimates could change, which could have a material impact on our operations and cash flows.

Accounts receivable – Accounts receivable are reported net of allowances 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 accounts receivable are due from Medicare, private insurance carriers and other third-party payors, as well as from customers under co-insurance and deductible provisions.

The Company’s allowance for sales adjustments and uncollectible accounts is primarily attributable to the Company’s SDC operating segment.  Third-party reimbursement is a complicated process that involves submission of claims to multiple payers, each having its own claims requirements.  In some cases, the ultimate collection of accounts receivable subsequent to the service dates may not be known for several months.  The Company has established an allowance to account for sales adjustments that result from differences between the amounts billed to customers and third-party payers and the expected realizable amounts.  The percentage and amounts used to record the allowance for doubtful accounts are supported by various methods including current and historical cash collections, sales adjustments, and aging of accounts receivable.

Goodwill and Intangible Assets – Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business.  Goodwill and other indefinitely-lived intangible assets are not amortized, but are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate there may be an impairment of goodwill.

Intangible assets other than goodwill which consist primarily of customer files and covenants not to compete are amortized over their estimated useful lives.  The remaining lives range from three to fifteen years.  The Company evaluates the recoverability of identifiable intangible asset whenever events or

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

Discontinued Operations – In conjunction with the Graymark Acquisition, management of the Company elected to discontinue its film production 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 consolidated balance sheets.  The income and expense from the ongoing marketing and distribution of the current film assets will be accounted for as discontinued operations.

Note 3 – Acquisitions

During three months ended March 31 2008, the Company’s ApothecaryRx 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 been included in the Company’s consolidated condensed statements of operations prospectively from the date of acquisition.  Purchase accounting was used to account for all of these acquisitions.  Below is the purchase price 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 for the three months ended March 31, 2008 have been prepared as if the acquisitions 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 only and is not necessarily indicative of the results of operations that actually would 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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Note 4 – Goodwill and Other Intangibles

Changes in the carrying amount of goodwill by operating segment during the 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 goodwill resulting from business acquisitions.  Goodwill and intangibles assets with indefinite lives must be tested for impairment at least once a year.  Carrying values are compared with fair values, and when the carrying value exceeds the fair value, the carrying value of the impaired asset is reduced to its fair value.  The Company tests goodwill for impairment on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist.  The performance of the test involves a two-step process.  The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill.  The Company generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies.  If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss.  The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of 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

Note 5 – Borrowings

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

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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

Note 6 – Income Taxes

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

Note 7 – Capital Structure

On January 11, 2008, the Company concluded a private placement of common stock and issued 599,999 shares of common stock (2,999,996 shares before effect of reverse stock split – see Note 10).  The net proceeds of the private placement offering were $938,500 ($1.56 per 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 purchase of 90,000 common stock shares for $1.93 each.

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

Note 8 – Stock Options and Warrants

Information with respect to stock options and warrants outstanding follows:

	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

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Note 9 – Segment Information

The Company operates in two reportable business segments:  ApothecarRx and SDC.  The Apothecary operating segment operates retail pharmacy stores throughout the central United States.  The SDC operating segment operates sleep diagnostic testing labs in Oklahoma and Texas.  The Company’s film production and distribution activities are included discontinued operations.  The Company’s remaining operations which primarily involve administrative activities associated 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

Note 10 – Reverse Stock Split

On March 13, 2008, the Company’s board of directors approved a reverse 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 split was a  reduction of our outstanding common stock shares from 117,701,997 to 23,540,399 shares, subject to adjustment for elimination of fractional shares.  All references to shares in the consolidated condensed financial statements and the accompanying notes, including but not limited to the number of shares and per share amounts, unless otherwise noted, have been adjusted to reflect the reverse split retroactively.  Previously awarded options and warrants to purchase shares of the Company’s common stock have also been retroactively adjusted to reflect the stock split.

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Note 11 – Subsequent Events

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

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

Overview

Graymark Healthcare, Inc. (“Graymark”) is organized in Oklahoma.  Prior to December 31, 2007, we were named Graymark Productions, Inc. and an independent producer and distributor of film entertainment content.  On January 2, 2008, we completed the acquisition of ApothecaryRx, LLC, (“ApothecaryRx”) and SDC Holdings, LLC (“SDC Holdings”), collectively referred to as the “Graymark Acquisition.”  For financial reporting purposes, Graymark was deemed acquired by ApothecaryRx and SDC Holdings and, accordingly, the historical financial statements prior to December 31, 2007 are those of ApothecaryRx and SDC Holdings as adjusted for the effect of the Graymark Acquisition.  The activities of Graymark prior to the Graymark Acquisition are no longer reflected in the historical financial statements as it was considered to be the acquired entity.  Goodwill of $5,426,815 was recorded as a result of the Graymark Acquisition reflecting the fair market value of common stock issued and liabilities assumed in excess of Graymark’s identifiable assets at the date of the Graymark Acquisition.  In conjunction with the Graymark Acquisition, all motion picture production operations were discontinued.  We will continue actively to distribute the motion pictures produced by Graymark.

On March 13, 2008, our board of directors approved a reverse split of our common stock at a ratio of 1 for 5 shares.  The effective date of the reverse split was set as April 11, 2008.  The effect of the reverse split was a  reduction of our 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 acquire and operate independent retail pharmacy stores selling prescription drugs and a small assortment of general merchandise including diabetic merchandise, over the 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.  We expect to expand our operations to additional states in the future, primarily in the central United States.  The results 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 provide diagnostic sleep testing services and treatment for sleep disorders at sleep diagnostic testing labs in Oklahoma and Texas.  Our products and services are used primarily by patients with obstructive sleep apnea.  These labs provide monitored sleep diagnostic testing services to determine sleep disorders in the patients being tested.  The majority of the sleep testing is to determine if a patient has obstructive sleep apnea.  Positive airway pressure provided by sleep/personal ventilation (or “CPAP”) equipment is the American Academy of Sleep Medicines preferred method of treatment for obstructive sleep apnea.  Our sleep diagnostic facilities also determine the correct pressure settings for patient treatment with positive airway pressure.  We sell CPAP equipment and supplies to patients who have tested positive for sleep apnea and have had their positive airway pressure determined.  The CPAP equipment is a medical device and can only be dispensed pursuant to a physician’s prescription.  There are minority ownership interests in our testing facilities.  The minority owners are physicians in the geographical area being served by the diagnostic sleep testing facility.  The results of operations 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 pharmacies located in Colorado, Illinois, Missouri, Minnesota, and Oklahoma.  We acquire financially successful independently-owned retail pharmacies from long-term owners that are approaching retirement.  Our acquired pharmacies have successfully maintained market share due to the convenient  proximity to health care providers and services, high customer service levels, longevity in the community, competitive pricing and supportive services and products such as compounded pharmaceuticals, durable medical equipment, and assisted and group living deliveries.  Our acquired and target acquisition stores are in mid-size, economically-stable

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communities.  We believe that a significant amount of the value of the acquired pharmacies resides in their name and key staff relationships in the community.  Following acquisition, we maintain the historic store name and key staff personnel.

In our Apothecary operating segment, we derive our revenue primarily from the retail sale of prescription drugs, non-prescription over-the-counter drugs and health related products.  We are unlike traditional full-line retail pharmacies in that most of our stores offer a very limited amount of what is known as “front-end merchandise” (that is, cosmetics, gift and sundry items and photographic development services).  Two of our 14 pharmacies provide pharmaceutical compounded prescriptions.  Compounded pharmaceuticals are physician prescribed and are specifically mixed and blended from bulk chemicals for patients’ treatment; generally for conditions that the attending physician deems are not effectively treated by manufactured pharmaceuticals available in standard formats or dosages or to which the patient has some form of sensitivity.  Our pharmacies are generally located within or closely adjacent to hospitals and major medical complexes, and cater to patients of those healthcare providers.  Other than some compounded prescriptions, our pharmacy services do not typically include intravenous infusion and injectable medications that are offered by hospital or home infusion pharmacies.

Following their acquisition, all of our pharmacies are converted to a standardized computer platform.  The computer platform we use is commercially available and represents modest investment but it allows for standardized pricing models, comparison of site metrics, low cost training and ease of reporting.  Our pharmacy computer system profiles customer medical and other relevant information, supplies customers with information concerning their drug purchases for income tax and insurance purposes and prepares prescription labels and receipts.  The computer platform also expedites transactions with third-party plans by electronically transmitting prescription information directly to the third-party plan and providing on-line adjudication.  At the time a prescription is filled, on-line adjudication confirms customer eligibility, prescription coverage, pricing and co-payment requirements and automatically bills the respective plan.  On-line adjudication also reduces losses from rejected claims and eliminates a portion of the administrative burden related to the billing and collection of receivables and related costs.

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

SDC Operating Segment

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

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

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Obstructive sleep apnea is considered to be one of the most common sleep problems.  OSA, is a condition that causes the soft tissue in the rear of the throat to narrow and repeatedly close during sleep.  Oxygen deficiency, elevated blood pressure and increased heart rate associated with OSA are related to increased risk of cardiovascular morbidity, stroke and heart attack.  Additionally, OSA may result in excessive daytime sleepiness, reduced cognitive functions, including memory loss, lack of concentration, depression and irritability.  According to National Heart, Lung and Blood Institute of the National Institutes of Health, approximately 80% of people in the United States who suffer from sleep apnea remain undiagnosed.  Increased awareness of OSA among doctors and patients in recent years is expected to continue fueling growth of the OSA diagnostic and treatment market at a rate of 15% to 20%.

The diagnosis of obstructive sleep apnea typically requires monitoring a patient during sleep.  During overnight testing, which usually takes place in a clinical setting, respiratory parameters 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 that there were approximately 3,000 sleep laboratories and centers in the United States.

Continuous positive airway pressure therapy, commonly referred to as CPAP therapy, has evolved as the primary method for the treatment of obstructive sleep apnea, in part because it is less invasive and more cost-effective than surgery.  Unlike surgery, which may only result in reduced snoring, CPAP therapy actually reduces or eliminates the occurrence of obstructive sleep apnea.  During this therapy, a patient sleeps with a nasal or facial mask connected by a tube to a small portable airflow generator that delivers room air at a predetermined continuous positive pressure.  The continuous air pressure acts as a pneumatic splint to keep the patient’s upper airway open and unobstructed.  As a result, the cycle of airway closures that leads to the disruption of sleep and other symptoms which characterize obstructive sleep apnea, is prevented or dramatically reduced.

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

The primary product we sell is a continuous positive airway pressure systems, commonly referred to as CPAP systems, that consist of a compact flow generator connected to a dual-port, air-filled cushion face mask and are used as therapy for obstructive sleep apnea.  The face mask is attached to a single-patient use positive end expiratory pressure valve designed to maintain positive airway pressure with the objective of increasing patient comfort and acceptance of the treatment.  The CPAP systems provide a  non-invasive and more comfortable way for treating obstructive sleep apnea.

CPAP flow generators are electro-mechanical devices that deliver continuous positive airway pressure through a nasal or full face mask to a patient suffering from obstructive sleep apnea in order to keep the patient’s airway open during sleep.  Given the importance of patient compliance in treating obstructive sleep apnea, the products are easy to use, lightweight, small and quiet, making them relatively unobtrusive at the bedside.  The latest generation of these products are self-adjusting CPAP devices that use pattern recognition technology to respond to changes in breathing patterns, as individual patient needs change.  It is the responsibility of the physician prescribing the CPAP to determine the appropriate type of device that we will supply for each patient.

For patients with more severe or complex obstructive sleep apnea, the bi-level CPAP is available.  These electro-mechanical devices allow inspiratory and expiratory pressures to be independently adjusted.

Mergers and Acquisitions

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

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Acquisition was completed on January 2, 2008, we have accounted for the Graymark Acquisition as though it occurred on December 31, 2007 because our shareholders approved the Graymark Acquisition in December 2007 and effectively consummated the associate change in control.  As part of the Graymark Acquisition, we delivered 102,000,000 shares of our common stock to the former equity interest owners of ApothecaryRx and SDC Holdings.  Roy T. Oliver and Stanton Nelson received 33,875,730 and 12,861,180 shares of common stock, respectively, as a result of their direct and indirect equity ownership interests in ApothecaryRx and SDC Holdings.  Prior to the Graymark Acquisition, Mr. Nelson served on our Board of Directors and Mr. Oliver was one of our greater than 10% shareholders.

For financial reporting purposes, ApothecaryRx and SDC Holding were considered the acquiring entities and historical financial statements prior to December 31, 2007 reflect the activities of ApothecaryRx and SDC Holdings as adjusted for the effect of the Graymark Acquisition.  Activities of Graymark prior to the Graymark Acquisition are no longer reflected in the historical financial statements included in this report.  Goodwill of $5,426,815 was recorded in connection with the Graymark Acquisition reflecting the fair market value of common stock issued and liabilities assumed in excess of Graymark’s identifiable assets at the date of the merger.

During the three months ended March 31, 2008, our Apothecary operating 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 are subject to impairment reviews annually, or more frequent if necessary.  We are required to evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the related operating unit below its carrying amount.  These circumstances may include without limitation

·a significant adverse change in legal factors or in business climate,

·unanticipated competition, or

·an adverse action or assessment by a regulator.

In evaluating whether goodwill is impaired, we compare the fair value of the operating unit to which the goodwill is assigned to the operating unit’s carrying amount, including goodwill.  The fair value of the operating unit will be estimated using a combination of the income, or discounted cash flows, approach and the market approach that utilize comparable companies’ data.  If the carrying amount of the operating unit (i.e., pharmacy or sleep center lab) exceeds its fair value, then the amount of the impairment loss must be measured.  The impairment loss would be calculated by comparing the implied fair value of an operating 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 other assets and liabilities of that operating unit based on their fair values.  The excess of the fair value of an operating unit over the amount assigned to its other assets and liabilities will be the implied fair value of goodwill.  An impairment loss will be recognized when the carrying amount of goodwill exceeds its implied fair value.

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Results of Operations

The following table sets forth selected results of our operations for the three months ended March 31, 2008.  We operate in two reportable business segments:  Apothecary and SDC.  The Apothecary operating segment includes the operations of our retail pharmacy stores.  The SDC operating segment includes the operations from our sleep diagnostic testing labs and related equipment sales.  Our film production and distribution activities are included as discontinued operations.  The following information was derived and taken from our unaudited financial 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 primarily due to

·the six acquisitions made by our Apothecary operating segment during the nine months ended December 31, 2007 and the three months ended March 31, 2008 which resulted in an increase in revenue of $8.9 million,

·the acquisition made by our SDC operating segment 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 in the 1st quarter of 2007 and

·an increase in revenue of $0.7 million due to additional 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 three months ended March 31, 2008 compared with the first three months of 2007.  The increase in cost of sales and services was primarily due to

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

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

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

·an increase in costs of sales and services of $0.3 million due to additional sleep studies performed by our SDC operating segment.  See the Segment Analysis, below,  for additional information.

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

Net interest expense increased approximately $227,000 during the three months ended March 31, 2008 compared with the first three months of 2007.  The increase in net interest expense is primarily due to the increase in borrowings resulting from the acquisitions made by our Apothecary and SDC operating segments.

Minority interests 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 equity ownership interests in our SDC subsidiaries that we do not wholly own.  The increase in minority interests was primarily due to the increased net income of those ours SDC subsidiaries attributable to the equity ownership interests we do not own.

Provision for 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 tax purposes and were not subject to income tax.

Income from discontinued operations were approximately $22,000 during the three months ended March 31, 2008 and represent the net income from our film operations which 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

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

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operated five pharmacy locations.  The increase in our pharmacy locations 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 million compared with the 1st quarter of 2007.

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

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

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

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

·$0.3 million in increased operational overhead.

Net interest expense increased approximately $145,000 during the three months ended March 31, 2008 compared with the first three months of 2007.  The increase in net interest expenses was primarily due to the increase in 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	)

Net revenues increased $1.7 million 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 three months of 2007 compared with three months of operations ended March 31, 2008 which resulted in an increase in net revenues of approximately $1.0 million and

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

Cost of 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 three months of 2007 compared with three months of operations ended

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

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

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

Operating expenses 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 increase in operating expenses associated with having three months of operation in the first three months of 2008 versus only two months in the 1^st quarter of 2007 which was offset by a reduction in operating expenses efficiencies gained in 2008.

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

Minority interests 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 equity ownership interests in our SDC subsidiaries that we do not wholly own.  The increase in minority interests was primarily due to the increased net income of those ours SDC subsidiaries attributable to the equity ownership interests we do not own.

Liquidity and Capital Resources

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

Our operating activities during the three months ended March 31, 2008 used net cash of approximately $1,492,000 compared to operating activities in the 1st quarter of 2007 that provided approximately $670,000.  The increase in cash flows used by operating activities was primarily attributable to an increase in accounts receivable, inventories, and a decrease in accounts payable.  These cash uses were offset by an increase in accrued liabilities.  In the 1st quarter of 2008, our operating activities included net income of $385,455 which was increased by depreciation and amortization of $306,987 and minority interests of $364,885.

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

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

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We expect to meet our obligations as they become due through available cash and funds generated from our operations, supplemented as necessary by debt financing.  We expect to generate positive working capital through our operations.  However, there are no assurances that we will be able to either achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain additional financing through debt financing to support our capital commitments and working capital requirements.  Our principal capital commitments during the next 12 months primarily involve payments of our indebtedness and lease obligations of approximately $20,858,000 as of March 31, 2008.

Financial Commitments

We do not have any capital commitments that we cannot meet with our current capital resources.  We are currently negotiating with the current lender replacement financing of our long-term indebtedness, including the portion that is due within the next 12 months (the short-term portion). 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 they become due through available cash and funds generated from our operations supplemented as necessary by debt financing.  We neither have any plans nor anticipate the need to raise additional equity capital during the next 12 months; however, we may receive additional funds from the exercise of outstanding warrants and stock options, the exercise of which is generally not within our control.

Our future commitments 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

Accounting Methods

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

Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or U.S. GAAP).

Recent Accounting Pronouncements

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

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

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SFAS 141(R) and SFAS 160 – In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations” (“SFAS 141 (R)”), replacing SFAS No. 141, “Business Combinations” (“SFAS 141”), and SFAS  160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51” (“SFAS  160”).  SFAS 141(R) retains the fundamental requirements of SFAS 141, and broadens its scope by applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, and requires, among other things,

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

·that liabilities related to contingent consideration be recognized at the acquisition date and remeasured at fair value in each subsequent reporting period,

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

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

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

Cautionary Statement Relating to Forward Looking Information

We have included some forward-looking statements in this section and other places in this report regarding our expectations.  These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, 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-looking statements.  Some of these forward-looking statements can be identified by the use of forward-looking terminology 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 these words carefully because they

·discuss our future expectations;

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

·state other “forward-looking” information.

We believe it is important to discuss our expectations; however, it must be recognized that events may occur in the future over which we have no control and which we are not accurately able to predict.  Readers are cautioned to consider the specific business risk factors described in this report and our Annual Report on Form 10-K and not to place undue reliance on the forward-looking statements contained in this report or our Annual Report, which speak only as of the date of this report or the date of our Annual Report.  We undertake no obligation to publicly revise forward-looking statements to reflect events or circumstances that may arise after the date of this report.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Management does not believe that there is any material market risk exposure with respect to derivative or

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other financial instruments that would require disclosure under this item.

Item 4.  Controls and Procedures and Item 4T. Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer are responsible primarily for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission.  These controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Furthermore, our Chief Executive Officer and Chief Financial Officer are responsible for the design and supervision of our internal controls over financial reporting  that are then effected by and through our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  These policies and procedures

·pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets,

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

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

Our Chief Executive Officer and Chief Financial Officer, based upon their evaluation of the effectiveness of our disclosure controls and procedures and the internal controls over financial reporting as of the last day of the period covered by this report, concluded that our disclosure controls and procedures and internal controls over financial reporting were fully effective as of the last day of the period covered by this report and reported to our auditors and board of directors that no change occurred in our disclosure controls and procedures and internal control over financial reporting occurred during the period covered by this report that would materially affect or is reasonably likely to materially affect our disclosure controls and procedures or internal control over financial reporting.  In conducting their evaluation of our disclosure controls and procedures and internal controls over financial reporting, these executive officers did not discover any fraud that involved management or other employees who have a significant role in our disclosure controls and procedures and internal controls over financial reporting.  Furthermore, there were no significant changes in our disclosure controls and procedures, internal controls over financial reporting, or other factors that could significantly affect our disclosure controls and procedures or internal controls over financial reporting subsequent to the date of their evaluation.  Because no significant deficiencies or material weaknesses were discovered, no corrective actions were necessary or taken to correct significant deficiencies and material weaknesses in our internal controls and disclosure controls and procedures.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

We do not have any legal proceedings to report.

Item 1A.  Risk Factors

There have been no material changes from the risk factors previously disclosed in our 2007 Annual Report

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on Form 10-K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

We do not have any thing to report under this Item.

Item 3.  Defaults Upon Senior Securities

We do not have any thing to report under this Item.

Item 4.  Submission of Matters to a Vote of Security Holders

We do not have any thing to report under this Item.

Item 5.  Other Information.

We do not have any thing to report under this Item.

Item 6.  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.

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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,

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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 with the Exchange Act, the Registrant caused this report to be signed on its behalf by 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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