e8vkza

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CHfvamG9nqXMN6cpuOqUSN3SjOjom8QvZLRBL8S7BbA13Hy4fljfGdPQSgvf/f2e fuJi4ZNMluUdN1fP3GXhOQ== 0000950123-09-071630.txt : 20091218 0000950123-09-071630.hdr.sgml : 20091218 20091217174304 ACCESSION NUMBER: 0000950123-09-071630 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20090824 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20091218 DATE AS OF CHANGE: 20091217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Graymark Healthcare, Inc. CENTRAL INDEX KEY: 0001272597 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 200180812 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-34171 FILM NUMBER: 091248085 BUSINESS ADDRESS: STREET 1: 101 N. ROBINSON STREET 2: SUITE 920 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 BUSINESS PHONE: 4056015300 MAIL ADDRESS: STREET 1: 101 N. ROBINSON STREET 2: SUITE 920 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 FORMER COMPANY: FORMER CONFORMED NAME: GRAYMARK PRODUCTIONS INC DATE OF NAME CHANGE: 20031210 8-K/A 1 d70402e8vkza.htm AMENDMENT TO FORM 8-K e8vkza

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

Amendment No. 2 to
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

Date of Report (date of earliest event reported): August 24, 2009

GRAYMARK HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)


Oklahoma	001-34171	20-0180812
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)


210 Park Avenue, Suite 1350 Oklahoma City, Oklahoma 73102		73102
(Address of principal executive offices)		(Zip Code)

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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14a-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Explanatory Note

This Current Report on Form 8-K/A is filed as an amendment to the Current Reports on Form 8-K filed by Graymark Healthcare, Inc. (the “Registrant” or the “Company”) on August 24, 2009 and September 15, 2009. The amendment is being filed to include the financial information required under Item 9.01 that was previously omitted in accordance with Item 9.01(a) and Item 9.01(b).

Item 9.01 of the aforementioned Current Report on Form 8-K is hereby amended to read as follows:

Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired.

The audited financial statements of Avastra Eastern Sleep Centers, Inc. are filed as Exhibit 99.2.

The audited financial statements of somniTech, Inc. are filed as Exhibit 99.3.

The audited financial statements of somniCare, Inc. are filed as Exhibit 99.4.

(b) Pro forma Financial Information.

The unaudited pro forma condensed combined financial information with respect to the transaction described in Item 2.01 is filed as Exhibit 99.5.

(d) Exhibits.

10.1*		Second Amendment to Stock Sale Agreement dated September 14, 2009 among SDC Holdings, LLC, AvastraUSA, Inc. and Avastra Sleep Centers Limited.

10.2*		Lock-up and Stock Pledge Agreement dated September 14, 2009 among Graymark Healthcare, Inc., SDC Holdings, LLC, AvastraUSA, Inc. and Avastra Sleep Centers Limited

10.3*		Settlement Agreement and Release dated September 14, 2009 among Daniel I. Rifkin, M.D., Graymark Healthcare, Inc., SDC Holdings, LLC, Avastra Sleep Centers Limited and AvastraUSA, Inc.

99.1*		Press Release issued September 15, 2009.

99.2		Audited financial statements of Avastra Eastern Sleep Centers, Inc. as of and for the periods ended June 30, 2009 and 2008.

99.3		Audited financial statements of somniTech, Inc. as of and for the years ended June 30, 2009 and 2008.

99.4		Audited financial statements of somniCare, Inc. as of and for the years ended June 30, 2009 and 2008.

99.5		Unaudited pro forma condensed combined financial information of Registrant.


*		Previously filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	GRAYMARK HEALTHCARE, INC. (Registrant)
	By:		/S/ STANTON NELSON
			Stanton Nelson, Chief Executive Officer

Date: December 17, 2009

EX-99.2 2 d70402exv99w2.htm EX-99.2 exv99w2

Exhibit 99.2

Report of Independent Registered Public Accounting Firm

To the Audit Committee, Board of Directors,

and Shareholders of Graymark Healthcare, Inc.

We have audited the accompanying balance sheets of Avastra Eastern Sleep Centers, Inc. as of June 30, 2009 and 2008, and the related statements of operations, shareholders’ equity, and cash flows for the year ended June 30, 2009 and the period from October 12, 2007 to June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2009 and 2008, and the results of its operations and its cash flows for the year ended June 30, 2009 and the period from October 12, 2007 to June 30, 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ Eide Bailly LLP

December 17, 2009
Minneapolis, Minnesota

F-1

AVASTRA EASTERN SLEEP CENTERS, INC.

Balance Sheets
As of June 30, 2009 and 2008


	2009		2008

ASSETS

Cash and cash equivalents	$	62,641	$	212,177
Accounts receivable, net of allowance for doubtful accounts of $179,504 and $48,988, respectively		732,523		593,430
Other current assets		77,908		77,665

Total current assets		873,072		883,272
Property and equipment, net		162,294		181,709
Deferred tax assets		512,085		493,552
Intangible assets, net		657,917		781,277
Goodwill		2,778,770		1,762,672

Total assets	$	4,984,138	$	4,102,482


LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	—	$	23,345
Accrued liabilities		836,523		477,217
Short-term debt		—		807,067
Current portion of long-term debt		25,141		23,423

Total current liabilities		861,664		1,331,052
Long-term debt, net of current portion		45,676		70,817

Total liabilities		907,340		1,401,869


Shareholders’ Equity:
Common stock no par value, 200 shares authorized; 100 issued and outstanding		—		—
Paid-in capital		2,873,578		2,070,081
Retained earnings		1,203,220		630,532

Total shareholders’ equity		4,076,798		2,700,613

Total liabilities and shareholders’ equity	$	4,984,138	$	4,102,482

See Accompanying Notes to Financial Statements

F-2

AVASTRA EASTERN SLEEP CENTERS, INC.

Statements of Operations


	Year Ended		Period from
	June 30,		10/12/2007
	2009		to 6/30/2008
Revenues	$	5,478,086	$	4,064,366
Cost of sales		2,376,043		1,624,783

Gross profit		3,102,043		2,439,583


Costs and Expenses:
Selling, general and administrative		1,959,152		1,265,896
Depreciation and amortization		166,899		111,181

		2,126,051		1,377,077

Income from continuing operations		975,992		1,062,506


Other Expense:
Interest expense		32,080		13,665
Other expense		17,796		23,724

Total other expense		49,876		37,389

Net income before provision for income taxes		926,116		1,025,117
Provision for income taxes		353,428		394,585

Net income	$	572,688	$	630,532

See Accompanying Notes to Financial Statements

F-3

AVASTRA EASTERN SLEEP CENTERS, INC.

Statements of Shareholders’ Equity
For the Year Ended June 30, 2009 and the
Period from October 12, 2007 to June 30, 2008


					Additional
	Common Stock				Paid-In			Retained
	Shares		Amount		Capital			Earnings
Balance, October 12, 2007		—	$	—	$	—		$	—
Issuance of common stock		100		—		—			—
Contributions from Parent		—		—		3,030,366			—
Distributions to Parent		—		—		(960,285	)		—
Net income		—		—		—			630,532

Balance, June 30, 2008		100		—		2,070,081			630,532
Contributions from Parent		—		—		1,851,451			—
Distributions to Parent		—		—		(1,047,954	)		—
Net income		—		—		—			572,688

Balance, June 30, 2009		100	$	—	$	2,873,578		$	1,203,220

See Accompanying Notes to Financial Statements

F-4

AVASTRA EASTERN SLEEP CENTERS, INC.

Statements of Cash Flows


	Year Ended			Period from
	June 30,			10/12/2007
	2009			to 6/30/2008
Operating activities:
Net income	$	572,688		$	630,532
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
Depreciation and amortization		166,899			111,181
Deferred income taxes		(18,533	)		(7,374	)
Changes in assets and liabilities —
Accounts receivable		(139,093	)		45,515
Other assets		(243	)		(77,665	)
Accounts payable		(23,345	)		552
Accrued liabilities		359,306			367,479

Net cash provided by operating activities		917,679			1,070,220


Investing activities:
Cash received in purchase of business		—			120,000
Purchase of business		—			(2,280,000	)
Payment of earnout obligation		(1,016,098	)		(226,337	)
Purchase of property and equipment		(24,124	)		(7,396	)

Net cash used in investing activities		(1,040,222	)		(2,393,733	)


Financing activities:
Contributions from Parent		1,851,451			2,517,098
Distributions to Parent		(1,047,954	)		(960,285	)
Debt payments		(830,490	)		(21,123	)

Net cash provided by (used in) financing activities		(26,993	)		1,535,690

Net change in cash and cash equivalents		(149,536	)		212,177
Cash and cash equivalents at beginning of period		212,177			—

Cash and cash equivalents at end of period	$	62,641		$	212,177


Noncash Investing and Financing Activities:
Seller-financing of acquisitions	$	—		$	807,000

Common stock issued by Parent in acquisition	$	—		$	513,268


Cash Paid for Interest and Income Taxes:
Interest expense	$	32,000		$	14,000

Income taxes	$	—		$	—

See Accompanying Notes to Financial Statements

F-5

AVASTRA EASTERN SLEEP CENTERS, INC.

Notes to Financial Statements

For the Year Ended June 30, 2009 and the
Period from October 12, 2007 to June 30, 2008

Note 1 — Nature of Business

Avastra Eastern Sleep Centers, Inc. (the “Company”) is organized in New York and began operations on October 12, 2007. The Company is a wholly-owned subsidiary of Avastra, LTD., an Australian corporation (the “Parent”). The Company operates facilities that provide diagnostic sleep testing services and treatment for sleep disorders at sleep diagnostic centers in Florida and New York. The Company’s services are used primarily by patients with obstructive sleep apnea. These centers 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. The Company’s sleep diagnostic facilities also determine the correct pressure settings for patient treatment with positive airway pressure.

Note 2 — Summary of Significant Accounting Policies

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 financial statements and accompanying notes. Actual results could differ from those estimates.

Subsequent events — We have evaluated subsequent events through the date the financial statements were issued on December 17, 2009.

Revenue recognition — Revenue from sleep center services are recognized in the period in which services are provided to customers and are recorded at net amounts estimated to be paid by the third party payors or customers. Insurance benefits are assigned to the Company and the Company bills on behalf of its customers.

Cash and cash equivalents — The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.

Accounts receivable — Accounts receivable are reported net of allowances for doubtful accounts of $179,504 and $48,988 as of June 30, 2009 and 2008, respectively. The majority of the Company’s accounts receivable are due from private insurance carriers, Medicaid / Medicare and other third party payors, as well as from customers under co-insurance and deductible provisions.

The Company’s allowance for doubtful accounts is an estimate of net amounts collectable based on the age of the accounts and historic collection patterns from the various payors. Accounts are written-off when, due to the age of the account or based on other specific information, the account is deemed uncollectable.

Property and equipment — Property and equipment is stated at cost and depreciated using the straight line method to depreciate the cost of various classes of assets over their estimated useful lives. At the time assets are sold or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and depreciation accounts; profits and losses on such dispositions are reflected in current operations. Fully depreciated assets are written off against accumulated depreciation. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

F-6

The estimated useful lives of the Company’s property and equipment are as follows:


Asset Class		Useful Life
Equipment		5 to 7 years
Software		3 years
Furniture and fixtures		7 years
Leasehold improvements		5 years or remaining lease period, whichever is shorter
Vehicles		5 years

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 of covenants not to compete are amortized over their estimated useful lives of seven years using the straight line method. The Company evaluates the recoverability of identifiable intangible asset whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.

Advertising Costs — Advertising and sales promotion costs are expensed as incurred. Advertising expense for the year ended June 30, 2009 and the period from October 12, 2007 to June 30, 2008 totaled $183,566. There was no advertising expense during the period from October 12, 2007 to June 30, 2008.

Income Taxes — The Company is part of a controlled group owned by Parent that collectively file a consolidated income tax return. Income taxes payable are recorded as a liability until such time as settled with Parent.

The Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In the event the Company determines that the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets is charged to earnings in the period in which the Company makes such a determination.

The Company uses a two-step process to evaluate a tax position. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company reports tax-related interest and penalties as a component of income tax expense.

F-7

2009, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current tax law and policy that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

Fair value of financial instruments — The recorded amounts of cash and cash equivalents, other receivables, and accrued liabilities approximate fair value because of the short-term maturity of these items. The Company calculates the fair value of its borrowings based on estimated market rates. Fair value estimates are based on relevant market information and information about the individual borrowings. These estimates are subjective in nature, involve matters of judgement and therefore, cannot be determined with precision. Estimated fair values are significantly affected by the assumptions used. Based on the Company’s calculations at June 30, 2009 and 2008, the carrying amount of the Company’s borrowings approximates fair value.

New Accounting Pronouncements —

FIN 48 — In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 is intended to clarify the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 became effective for the years beginning after December 15, 2006.

Under FIN 48, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

The adoption of FIN 48 did not have a material impact on the Company’s financial position, results of operations, or cash flows as of June 30, 2009 and 2008.

SFAS 157 — In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 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 GAAP. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009. The adoption of SFAS 157 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

F-8

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. Management is assessing the impact SFAS 160 will have on the Company’s financial statements.

Note 3 — Acquisition

On October 12, 2007, the Company purchased all of the assets of Sleep Medicine Centers of Western New York (“Sleep New York”) and Sleep Medicine Centers of Florida (“Sleep Florida”), (collectively “Eastern Acquisition”) for $2.8 million. Purchase consideration for the Eastern Acquisition included $2.3 million in cash and 1,130,000 shares of Parent common stock valued at $0.5 million. The Company believes that the Eastern Acquisition solidifies the Company as a national leader in quality sleep medicine. The goodwill related to the Eastern Acquisition is expected to be deductible tax purposes.

The following table presents the purchase price allocation, to the assets acquired and liabilities assumed, based on fair market values:


	Eastern
	Acquisition
Cash and cash equivalents	$	120,000
Accounts receivable		638,945

Total current assets		758,945

Property and equipment		203,254
Deferred tax asset		486,178
Intangible assets		863,517
Goodwill		729,268

Total assets acquired		3,041,162

Accounts payable		22,793
Accrued liabilities		109,738
Long-term debt		115,363

Total liabilities assumed		247,894

Total purchase price	$	2,793,268

In addition, the former owner of Sleep New York and Sleep Florida, who is also the Company’s president, is entitled to receive earnout payments for a period of five years after the date of acquisition. The earnout payments are based on a percentage, ranging from 65% to 90%, of earnings before interest and taxes as defined (“EBIT”). If the earnout payments are not made, the former owner has the ability to repurchase the Company at a price equal to the net book value of the Company’s assets. During the year ended June 30, 2009, the former owner was paid an earnout obligation of $1.0 million. During the period ended June 30, 2008, the former owner became entitled to an earnout payment of $1.0 million. Approximately $0.8 million of the earnout payment in the period ended June 30, 2008 was financed by the former owner.

The results of operations from the Eastern acquisition have been included in the Company’s statement of operations prospectively from the date of acquisition.

F-9

Note 4 — Property and Equipment

Following are the components of property and equipment included in the accompanying balance sheets as of June 30, 2009 and 2008:


	2009			2008
Equipment	$	136,760		$	127,118
Furniture and fixtures		65,027			61,181
Software		11,173			6,437
Vehicles		15,914			15,913
Leasehold improvements		5,900			—

		234,774			210,649

Accumulated depreciation		(72,480	)		(28,941	)

	$	162,294		$	181,708

Depreciation expense for the year ended June 30, 2009 and the period from October 12, 2007 to June 30, 2008 was $43,539 and $28,941, respectively.

Note 5 — Goodwill and Other Intangibles

Changes in the carrying amount of goodwill during the year ended June 30, 2009 and the period from October 12, 2007 to June 30, 2008 were as follows:


October 12, 2007	$	—
Eastern Acquisition		729,268
Earnout payment		1,033,404

June 30, 2008		1,762,672
Earnout payment		1,016,098

June 30, 2009	$	2,778,770

As of June 30, 2009, the Company had $2.8 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 June 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.

The Company’s evaluation of goodwill completed during June 2009 and 2008 resulted in no impairment losses.

F-10

Intangible assets as of June 30, 2009 and 2008 include the following:


	Useful		2009							2008
	Life		Gross		Accumulated					Gross		Accumulated
	(Years)		Amount		Amortization			Net		Amount		Amortization			Net
Covenants not to compete		7	$	863,517	$	(205,600	)	$	657,917	$	863,517	$	(82,240	)	$	781,277

Amortization expense for the year ended June 30, 2009 and the period from October 12, 2007 to June 30, 2008 was $123,360 and $82,240, respectively. Amortization expense for the next five years related to theses intangible assets is expected to be $123,360 in each year.

Note 6 — Short Term Debt

As of June 30, 2008, the Company had an unsecured note payable to the former owners of Sleep Florida and Sleep New York in the amount of $807,067. The note beared interest at 8% per annum and was paid during the year ended June 30, 2009. Interest expense paid to the former owner during the year ended June 30, 2009 and 2008 was $28,284 and $10,761, respectively.

Note 7 — Long Term Debt

As of June 30, 2009 and 2008, the Company had an unsecured note payable to a bank in the amount of $70,817 and $94,240, respectively. The note bears interest at a fixed rate of 7.10% and matures on February 5, 2012. The Company is required to make monthly payments of principal and interest of $2,447.

At June 30, 2009, future maturities of long-term debt were as follows:


2010	$	25,141
2011		26,986
2012		18,690

Note 8 — Operating Leases

The Company leases all of the real property used in its business for office space and sleep testing facilities under operating lease agreements. Rent is expensed as paid consistent with the terms of each lease agreement over the term of each lease. In addition to minimum lease payments, certain leases require reimbursement for common area maintenance and insurance, which are expensed when incurred.

The Company’s rental expense for operating leases the year ended June 30, 2009 and the period from October 12, 2007 to June 30, 2008 was $314,837 and $193,687, respectively.

Following is a summary of the future minimum lease payments under operating leases as of June 30, 2009:


2010	$	309,796
2011		242,561
2012		152,336
2013		90,634
2014		84,670
Thereafter		—

Total	$	879,997

F-11

Note 9 — Income Taxes

The Company’s income tax provision consists of:


	Year Ended			Period from
	June 30,			10/12/2007 to
	2009			6/30/2008
Current provision	$	371,961		$	401,959
Deferred provision (benefit)		(18,533	)		(7,374	)

Total	$	353,428		$	394,585

Deferred income tax assets and liabilities as of June 30, 2009 and 2008 are comprised of:


	2009			2008

Deferred income tax assets:
Goodwill	$	432,159		$	464,570
Intangible assets		43,861			17,545
Accounts receivable		71,802			19,595

Total deferred tax assets		547,822			501,710
Deferred income tax liabilities:
Fixed assets, net		(35,737	)		(8,158	)

Deferred tax asset, net	$	512,085		$	493,552

The provision for income taxes differs from the amount computed by multiplying income before taxes by the statutory federal income tax rate due to state income taxes, differences between book and tax depreciation and amortization, and nondeductible allowance for bad debts. Income taxes payable at June 30, 2009 and 2008, was $773,920 and $401,959, respectively.

Note 10 — Subsequent Event

On September 14, 2009, 100% of the ownership of the Company was sold to Graymark Healthcare, Inc. for $4,700,000.

F-12

EX-99.3 3 d70402exv99w3.htm EX-99.3 exv99w3

Exhibit 99.3

Report of Independent Registered Public Accounting Firm

To the Audit Committee, Board of Directors,
and Shareholders of Graymark Healthcare, Inc.

We have audited the accompanying balance sheets of somniTech, Inc. as of June 30, 2009 and 2008, and the related statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Eide Bailly LLP

December 17, 2009
Minneapolis, Minnesota

F-1

SOMNITECH, INC.

Balance Sheets
As of June 30, 2009 and 2008


	2009		2008

ASSETS

Cash and cash equivalents	$	89,985	$	242,714
Accounts receivable, net of allowance for doubtful accounts of $80,201 and $97,634, respectively		815,487		939,704
Receivable from somniCare, Inc.		—		143,184
Other current assets		18,914		24,529

Total current assets		924,386		1,350,131
Property and equipment, net		840,522		1,051,411
Intangible assets, net		103,316		123,979
Goodwill		3,055,189		2,322,612
Other assets		389,799		23,518

Total assets	$	5,313,212	$	4,871,651


LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	118,773	$	125,588
Accrued liabilities		1,014,410		966,871
Payable to somniCare, Inc.		281,102		—
Short-term debt		919,423		500,000
Current portion of long-term debt		283,305		271,357

Total current liabilities		2,617,013		1,863,816
Deferred tax liabilities		54,436		44,802
Long-term debt, net of current portion		403,117		320,607

Total liabilities		3,074,566		2,229,225

Shareholders’ Equity:
Common stock $0.0001 par value, 1,000 shares authorized, issued and outstanding		—		—
Paid-in capital		1,175,577		1,636,746
Retained earnings		1,063,069		1,005,680

Total shareholders’ equity		2,238,646		2,642,426

Total liabilities and shareholders’ equity	$	5,313,212	$	4,871,651

See Accompanying Notes to Financial Statements

F-2

SOMNITECH, INC.

Statements of Operations
For the Years Ended June 30, 2009 and 2008


	2009			2008
Revenues	$	7,886,742		$	7,885,556
Cost of sales		2,745,763			2,521,925

Gross profit		5,140,979			5,363,631

Costs and Expenses:
Selling, general and administrative		4,586,989			4,636,629
Depreciation and amortization		389,203			417,600

		4,976,192			5,054,229

Income from continuing operations		164,787			309,402

Other (Income) Expense:
Interest expense		94,296			83,703
Other (income)		(18,999	)		(10,704	)

Total other expense, net		75,297			72,999

Net income before provision for income taxes		89,490			236,403
Provision for income taxes		32,101			85,376

Net income	$	57,389		$	151,027

See Accompanying Notes to Financial Statements

F-3

SOMNITECH, INC.

Statements of Shareholders’ Equity
For the Years Ended June 30, 2009 and 2008


					Additional
	Common Stock				Paid-In			Retained
	Shares		Amount		Capital			Earnings

Balance, June 30, 2007		1,000	$	—	$	2,029,938		$	854,653

Distributions to Parent		—		—		(393,192	)		—
Net income		—		—		—			151,027

Balance, June 30, 2008		1,000		—		1,636,746			1,005,680

Contributions from Parent		—		—		350,408			—
Distributions to Parent		—		—		(811,577	)		—
Net income		—		—		—			57,389

Balance, June 30, 2009		1,000	$	—	$	1,175,577		$	1,063,069

See Accompanying Notes to Financial Statements

F-4

SOMNITECH, INC.

Statements of Cash Flows
For the Years Ended June 30, 2009 and 2008


	2009			2008
Operating activities:
Net income	$	57,389		$	151,027
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		389,203			417,600
Deferred income taxes		9,634			3,317
Changes in assets and liabilities —
Accounts receivable		124,217			(115,246	)
Due to / from somniCare, Inc.		424,286			199,052
Other assets		5,615			21,017
Accounts payable		(6,815	)		4,641
Other liabilities		22,385			91,481

Net cash provided by operating activities		1,025,914			772,889


Investing activities:
Payment of earnout obligation		(288,000	)		—
Purchase of property and equipment		(157,651	)		(185,864	)
Deposit paid on software and equipment		(366,281	)		—

Net cash used in investing activities		(811,932	)		(185,864	)


Financing activities:
Contributions from Parent		350,408			—
Distributions to Parent		(811,577	)		(393,192	)
Debt proceeds		376,393			143,043
Debt payments		(281,935	)		(471,203	)

Net cash used in financing activities		(366,711	)		(721,352	)

Net change in cash and cash equivalents		(152,729	)		(134,327	)
Cash and cash equivalents at beginning of year		242,714			377,041

Cash and cash equivalents at end of year	$	89,985		$	242,714


Noncash Investing and Financing Activities:
Seller-financing of earnout obligation	$	419,423		$	—

Accrual of earnout obligation	$	25,154		$	707,423


Cash Paid for Interest and Income Taxes:
Interest expense	$	94,000		$	84,000

Income taxes	$	—		$	—

See Accompanying Notes to Financial Statements

F-5

SOMNITECH, INC.

Notes to Financial Statements

For the Years Ended June 30, 2009 and 2008

Note 1 — Nature of Business

somniTech, Inc. (the “Company”) is organized in Kansas and is a wholly-owned subsidiary of Avastra, LTD., an Australian corporation (the “Parent”). The Company provides sleep testing services and treatment for sleep disorders at sleep diagnostic centers in Iowa, Kansas, Minnesota, Missouri, Nebraska and South Dakota. The Company’s services are used primarily by patients with obstructive sleep apnea. These centers 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. The Company’s sleep diagnostic facilities also determine the correct pressure settings for patient treatment with positive airway pressure.

Note 2 — Summary of Significant Accounting Policies

Subsequent events — We have evaluated subsequent events through the date the financial statements were issued on December 17, 2009.

Cash and cash equivalents — The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.

Accounts receivable — Accounts receivable are reported net of allowances for doubtful accounts of $80,201 and $97,634 as of June 30, 2009 and 2008, respectively. The majority of the Company’s accounts receivable are due from private insurance carriers, Medicaid / Medicare and other third party payors, as well as from customers under co-insurance and deductible provisions.

F-6

The estimated useful lives of the Company’s property and equipment are as follows:


Asset Class		Useful Life

Equipment		5 to 7 years
Software		3 to 7 years
Furniture and fixtures		7 years
Leasehold improvements		25 years or remaining lease period, whichever is shorter
Vehicles		3 to 5 years

Advertising Costs — Advertising and sales promotion costs are expensed as incurred. Advertising expense for the years ended June 30, 2009 and 2008 totaled $62,554 and $54,261, respectively.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of June 30, 2009, is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of June, 2009, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current tax law and policy that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or

F-7

in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

New Accounting Pronouncements —

The adoption of FIN 48 did not have a material impact on the Company’s financial position, results of operations, or cash flows as of June 30, 2009 and 2008.

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

F-8

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. Management is assessing the impact SFAS 160 will have on the Company’s financial statements.

Note 3 — Property and Equipment

Following are the components of property and equipment included in the accompanying balance sheets as of June 30, 2009 and 2008:


	2009			2008
Equipment	$	1,748,427		$	1,665,976
Furniture and fixtures		543,561			537,499
Software		262,952			256,001
Vehicles		135,623			97,397
Leasehold improvements		469,723			472,858

		3,160,286			3,029,731

Accumulated depreciation		(2,319,764	)		(1,978,320	)

	$	840,522		$	1,051,411

Depreciation expense for the years ended June 30, 2009 and 2008 was $368,540 and $396,937, respectively.

Note 4 — Goodwill and Other Intangibles

The change in the carrying amount of goodwill during the year ended June 30, 2009 and 2008 was as follows:


June 30, 2007	$	1,615,189
Earnout obligation		707,423

June 30, 2008		2,322,612
Earnout obligation		732,577

June 30, 2009	$	3,055,189

The earnout obligation is to the former owner of the Company who is also a member of the Company’s management team.

As of June 30, 2009, the Company had $3.1 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 June 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.

F-9

The Company’s evaluation of goodwill completed during June 2009 and 2008 resulted in no impairment losses.

Intangible assets as of June 30, 2009 and 2008 include the following:



	Useful		2009							2008
	Life		Gross		Accumulated					Gross		Accumulated
	(Years)		Amount		Amortization			Net		Amount		Amortization			Net
Covenants not to compete		7	$	144,642	$	(41,326	)	$	103,316	$	144,642	$	(20,663	)	$	123,979

Amortization expense for the years ended June 30, 2009 and 2008 was $20,663 and $20,633, respectively. Amortization expense for the next five years related to theses intangible assets is expected to be $20,633 in each year.

Note 5 — Other Assets

As of June 30, 2009, the Company had on deposit $366,281 for the purchase of sleep diagnostic software and equipment. The deposit is included in other assets in the accompanying balance sheet. The Company is obligated to pay an additional $278,500 to complete the purchase.

Note 6 — Short Term Debt

As of June 30, 2009, the Company had a note payable to the former owner of the Company in the amount of $419,423. The note bears interest at 8% per annum and matures on August 15, 2009. Interest on the note is payable monthly beginning on November 1, 2008; principal is due at maturity. Interest expense paid to the former owner during the year ended June 30, 2009 was $30,445. No interest expense was paid to the former owner during the year ended June 30, 2008. The Company granted a security interest in 100% of the Company’s common stock to the former owner of the Company to secure the Company’s earnout obligations and short-term debt owed to the former owner. This note was paid-off in August 2009.

As of June 30, 2009 and 2008, the Company had a line of credit to a bank in the amount of $500,000. The line of credit is secured by a security interest in all assets of the Company. The line of credit bears interest at 4.5% per annum and matures on October 31, 2009. Interest on the line of credit is due monthly. As of June 30, 2009, there was no amount available to borrow on the line of credit.

Note 7 — Long Term Debt

As of June 30, 2009 and 2008, the Company had notes payable to a bank totaling $671,691 and $540,844, respectively. The notes are secured by a security interest in all assets of the Company. The notes payable are secured by a security interest in all assets of the Company. The notes bear interest at fixed rates ranging from 7.3% to 8.4% and mature on dates ranging from July 29, 2009 to June 1, 2013. As of June 30, 2009, the Company is required to make monthly payments of principal and interest totaling $99,490. As of June 30, 2009, two of the notes payable have a combined $336,790 which is still available to be drawn. The undrawn amount will be advanced as the Company completes the purchase of the sleep diagnostic software and equipment discussed in Note 5.

As of June 30, 2009 and 2008, the Company had notes payable used for the purchase of vehicles and equipment totaling $14,731 and $51,121, respectively. The notes are secured by the respective vehicle or equipment financed and bear interest at fixed rates ranging from 4% to 13% and mature on dates ranging from October 1, 2009 to September 23, 2010. As of June 30, 2009, the Company is required to make monthly payments of principal and interest totaling $4,903.

F-10

At June 30, 2009, future maturities of long-term debt were as follows:


2010	$	283,305
2011		193,892
2012		109,085
2013		100,140

Note 8 — Operating Leases

The Company’s rental expense for operating leases the years ended June 30, 2009 and 2008 was $610,620 and $586,103, respectively.

Following is a summary of the future minimum lease payments under operating leases as of June 30, 2009:


2010	$	531,474
2011		473,051
2012		293,901
2013		229,559
2014		194,519
Thereafter		2,440,000

Total	$	4,162,504

Note 9 — Income Taxes

The Company’s income tax provision for the years ended June 30, 2009 and 2008 consists of:


	2009		2008
Current provision	$	22,467	$	82,059
Deferred provision		9,634		3,317

Total	$	32,101	$	85,376

Deferred income tax assets and liabilities as of June 30, 2009 and 2008 are comprised of:


	2009			2008
Deferred income tax assets:
Intangible assets	$	10,102		$	5,694
Accounts receivable		32,080			39,054

Total deferred tax assets		42,182			44,748
Deferred income tax liabilities:
Fixed assets, net		(96,618	)		(89,550	)

Deferred tax liability, net	$	(54,436	)	$	(44,802	)

F-11

Note 10 — Related Party Transaction

The Company’s corporate offices are occupied under a 60-month lease with Tripod, L.L.C. (“Tripod”), requiring monthly rental payments of $12,696; the lease matures on September 30, 2011. Ms. Pamela R. Gillis, a member of the Company’s management team, controls Tripod. During the year ended June 30, 2009 and 2008, the Company incurred $152,352 in lease expense under the terms of the lease.

One of the Company’s sleep center location is occupied under a 25 year lease with PRG, L.L.C. (“PRG”), requiring monthly rental payments of $15,250; the lease matures on October 31, 2027. Ms. Pamela R. Gillis, a member of the Company’s management team, controls PRG. During the year ended June 30, 2009 and 2008, the Company incurred $183,000 in lease expense under the terms of the lease.

During the year ended June 30, 2009 and 2008, the Company paid Parent $205,400 and $102,900, respectively, for billing and collection services performed by Parent on behalf of the Company.

As of June 30, 2009, the Company had a payable to somniCare, Inc. (“somniCare”) for $281,102. As of June 30, 2008, the Company had a receivable from somniCare for $143,184. somniCare is an entity under common ownership of Parent.

Note 11 — Subsequent Event

On August 24, 2009, 100% of the ownership of the Company was sold to Graymark Healthcare, Inc. (“Graymark”) for $2,594,000. In conjunction with the sale to Graymark, Graymark settled all existing and future earnout obligations with the former owner of the Company.

F-12

EX-99.4 4 d70402exv99w4.htm EX-99.4 exv99w4

Exhibit 99.4

Report of Independent Registered Public Accounting Firm

To the Audit Committee, Board of Directors,
and Shareholders of Graymark Healthcare, Inc.

We have audited the accompanying balance sheets of somniCare, Inc. as of June 30, 2009 and 2008, and the related statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Eide Bailly LLP

December 17, 2009
Minneapolis, Minnesota

F-1

SOMNICARE, INC.

Balance Sheets
As of June 30, 2009 and 2008


	2009		2008
ASSETS

Cash and cash equivalents	$	85,404	$	109,785
Accounts receivable, net of allowance for doubtful accounts of $106,358 and $147,144, respectively		228,998		241,471
Receivable from somniTech, Inc		281,102		—
Inventories		60,825		57,050
Other current assets		2,121		—

Total current assets		658,450		408,306
Property and equipment, net		46,119		61,392
Goodwill		1,161,471		876,580
Deferred tax asset		37,427		54,160
Other assets		—		300

Total assets	$	1,903,467	$	1,400,738


LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	1,747	$	37,181
Accrued liabilities		724,021		410,545
Payable to somniTech, Inc		—		143,184
Short-term debt		163,109		—
Current portion of long-term debt		17,436		17,283

Total current liabilities		906,313		608,193
Long-term debt, net of current portion		1,507		18,991

Total liabilities		907,820		627,184


Shareholders’ Equity:
Common stock $0.0001 par value, 1,000 shares authorized, issued and outstanding		—		—
Paid-in capital		297,151		555,147
Retained earnings		698,496		218,407

Total shareholders’ equity		995,647		773,554

Total liabilities and shareholders’ equity	$	1,903,467	$	1,400,738

See Accompanying Notes to Financial Statements

F-2

SOMNICARE, INC.

Statements of Operations
For the Years Ended June 30, 2009 and 2008


	2009			2008
Revenues	$	2,312,560		$	1,469,113
Cost of sales		812,202			724,110

Gross profit		1,500,358			745,003

Costs and Expenses:
Selling, general and administrative		667,412			505,276
Depreciation		23,547			27,032

		690,959			532,308

Income from continuing operations		809,399			212,695

Other (Income) Expense:
Interest expense		16,431			8,293
Other (income)		(1,020	)		(34,137	)

Total other (income) expense, net		15,411			(25,844	)

Net income before provision for income taxes		793,988			238,539
Provision for income taxes		313,899			96,240

Net income	$	480,089		$	142,299

See Accompanying Notes to Financial Statements

F-3

SOMNICARE, INC.

Statements of Shareholders’ Equity
For the Years Ended June 30, 2009 and 2008


					Additional
	Common Stock				Paid-In			Retained
	Shares		Amount		Capital			Earnings
Balance, June 30, 2007		1,000	$	—	$	610,967		$	76,108
Distributions to Parent		—		—		(55,820	)		—
Net income		—		—		—			142,299

Balance, June 30, 2008		1,000		—		555,147			218,407
Contributions from Parent		—		—		123,840			—
Distributions to Parent		—		—		(381,836	)		—
Net income		—		—		—			480,089

Balance, June 30, 2009		1,000	$	—	$	297,151		$	698,496

See Accompanying Notes to Financial Statements

F-4

SOMNICARE, INC.

Statements of Cash Flows
For the Years Ended June 30, 2009 and 2008


	2009			2008
Operating activities:
Net income	$	480,089		$	142,299
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		23,547			27,032
Deferred income taxes		16,733			(26,200	)
Gain on sale of fixed assets		—			(26,915	)
Changes in assets and liabilities —
Accounts receivable		12,473			123,445
Due to / from somniTech, Inc.		(424,286	)		(199,052	)
Inventories		(3,775	)		(2,740	)
Other assets		(1,821	)		—
Accounts payable		(35,434	)		(9,142	)
Other liabilities		303,694			87,885

Net cash provided by operating activities		371,220			116,612


Investing activities:
Payment of earnout obligation		(112,000	)		—
Purchase of property and equipment		(8,274	)		(2,623	)
Sale of property and equipment		—			34,645

Net cash provided by (used in) investing activities		(120,274	)		32,022


Financing activities:
Contributions from Parent		123,840			—
Distributions to Parent		(381,836	)		(55,820	)
Debt payments		(17,331	)		(16,233	)

Net cash used in financing activities		(275,327	)		(72,053	)

Net change in cash and cash equivalents		(24,381	)		76,581
Cash and cash equivalents at beginning of year		109,785			33,204

Cash and cash equivalents at end of year	$	85,404		$	109,785


Noncash Investing and Financing Activities::
Seller-financing of earnout obligation	$	163,109		$	—

Accrual of earnout obligation	$	9,782		$	275,109


Cash Paid for Interest and Income Taxes:
Interest expense	$	5,000		$	8,000

Income taxes	$	—		$	—

See Accompanying Notes to Financial Statements

F-5

SOMNICARE, INC.

Notes to Financial Statements

For the Years Ended June 30, 2009 and 2008

Note 1 — Nature of Business

somniCare, Inc. (the “Company”) is organized in Kansas and is a wholly-owned subsidiary of Avastra, LTD., an Australian corporation (the “Parent”). The Company provides products for the treatment for sleep disorders at sleep diagnostic centers in Iowa, Kansas, Minnesota, Missouri, Nebraska and South Dakota. The Company’s products are used primarily by patients with obstructive sleep apnea. These centers 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. The Company’s sleep diagnostic facilities also determine the correct pressure settings for patient treatment with positive airway pressure.

Note 2 — Summary of Significant Accounting Policies

Subsequent events — We have evaluated subsequent events through the date the financial statements were issued on December 17, 2009.

Revenue recognition — Revenue from the sale of sleep center products are recognized in the period in which products are provided to customers and are recorded at net amounts estimated to be paid by the third party payors or customers. Insurance benefits are assigned to the Company and the Company bills on behalf of its customers.

Cash and cash equivalents — The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.

Accounts receivable — Accounts receivable are reported net of allowances for doubtful accounts of $106,358 and $147,144 as of June 30, 2009 and 2008, respectively. The majority of the Company’s accounts receivable are due from private insurance carriers, Medicaid / Medicare and other third party payors, as well as from customers under co-insurance and deductible provisions.

Inventories — Inventories are stated at the lower of cost or market and include the cost of products acquired for sale. The Company accounts for inventories using the first in—first out method of accounting for substantially all of its inventories.

F-6

written off against accumulated depreciation. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

The estimated useful lives of the Company’s property and equipment are as follows:


Asset Class		Useful Life
Equipment		5 to 7 years
Software		3 to 7 years
Furniture and fixtures		7 years
Leasehold improvements		5 years or remaining lease period, whichever is shorter
Vehicles		3 to 5 years

Goodwill — 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.

Advertising Costs — Advertising and sales promotion costs are expensed as incurred. Advertising expense for the years ended June 30, 2009 and 2008 totaled $5,817 and $5,192, respectively.

F-7

in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

New Accounting Pronouncements —

The adoption of FIN 48 did not have a material impact on the Company’s financial position, results of operations, or cash flows as of June 30, 2009 and 2008.

F-8

Note 3 — Property and Equipment

Following are the components of property and equipment included in the accompanying balance sheets as of June 30, 2009 and 2008:


	2009			2008
Equipment	$	50,687		$	44,863
Furniture and fixtures		5,008			4,186
Software		18,310			18,310
Vehicles		73,755			98,875
Leasehold improvements		1,621			—

		149,381			166,234

Accumulated depreciation		(103,262	)		(104,842	)

	$	46,119		$	61,392

Depreciation expense for the years ended June 30, 2009 and 2008 was $23,547 and $27,032, respectively.

Note 4 — Goodwill

The change in the carrying amount of goodwill during the year ended June 30, 2009 and 2008 was as follows:


June 30, 2007	$	601,471
Earnout obligation		275,109

June 30, 2008		876,580
Earnout obligation		284,891

June 30, 2009	$	1,161,471

The earnout obligation was made to the former owner of the Company who is also a member of the Company’s management team.

As of June 30, 2009, the Company had $1.2 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 June 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.

F-9

The Company’s evaluation of goodwill completed during June 2009 and 2008 resulted in no impairment losses.

Note 5 — Short Term Debt

As of June 30, 2009, the Company had a note payable to the former owners of the Company in the amount of $163,109. The note bears interest at 8% per annum and matures on August 15, 2009. Interest on the note is payable monthly beginning on November 1, 2008; principal is due at maturity. Interest expense paid to the former owner during the year ended June 30, 2009 was $11,840. No interest expense was paid to the former owner during the year ended June 30, 2008. The Company granted a security interest in 100% of the Company’s common stock to the former owner of the Company to secure the Company’s earnout obligations and short-term debt owed to the former owner.

Note 6 — Long Term Debt

As of June 30, 2009 and 2008, the Company had notes payable used for the purchase of vehicles and equipment totaling $18,943 and $36,274, respectively. The notes are secured by the respective vehicle or equipment financed and bear interest at fixed rates ranging from 2.9% to 7.8% and mature on dates ranging from June 1, 2010 to September 24, 2010. As of June 30, 2009, the Company is required to make monthly payments of principal and interest totaling $1,585.

At June 30, 2009, future maturities of long-term debt were as follows:


2010	$	17,436
2011		1,507

Note 7 — Operating Leases

The Company’s rental expense for operating leases the years ended June 30, 2009 and 2008 was $38,064 and $30,454, respectively.

Following is a summary of the future minimum lease payments under operating leases as of June 30, 2009:


2010	$	40,753
2011		40,753
2012		18,429
2013		—
2014		—
Thereafter		—

Total	$	99,935

F-10

Note 8 — Income Taxes

The Company’s income tax provision for the years ended June 30, 2009 and 2008 consists of:


	2009		2008
Current provision	$	297,166	$	122,440
Deferred provision (benefit)		16,733		(26,200	)

Total	$	313,899	$	96,240

Deferred income tax assets and liabilities as of June 30, 2009 and 2008 are comprised of:


	2009			2008
Deferred income tax assets:
Accounts receivable	$	42,543		$	58,858
Deferred income tax liabilities:
Fixed assets, net		(5,116	)		(4,698	)

Deferred tax asset, net	$	37,427		$	54,160

Note 9 — Related Party Transaction

The Company’s corporate offices are occupied under a 60-month lease with Tripod, L.L.C. (“Tripod”), requiring monthly rental payments of $2,023; the lease matures on September 30, 2011. Ms. Pamela R. Gillis, the Company’s president, controls Tripod. During the year ended June 30, 2009 and 2008, the Company incurred $24,272 in lease expense under the terms of the lease.

During the year ended June 30, 2009 and 2008, the Company paid Parent $75,600 and $44,100, respectively, for billing and collection services performed by Parent on behalf of the Company.

As of June 30, 2009, the Company had a receivable from somniTech, Inc. (“somniTech”) for $281,102. As of June 30, 2008, the Company had a payable to somniTech for $143,184. somniTech is an entity under common ownership of Parent.

Note 10 — Subsequent Event

On August 24, 2009, 100% of the ownership of the Company was sold to Graymark Healthcare, Inc. (“Graymark”) for $3,306,000. In conjunction with the sale to Graymark, Graymark settled all existing and future earnout obligations with the former owner of the Company.

F-11

EX-99.5 5 d70402exv99w5.htm EX-99.5 exv99w5

Exhibit 99.5

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On August 24, 2009, we at Graymark Healthcare, Inc. (the “Company”), completed the purchase of the outstanding stock of somniTech, Inc. and somniCare, Inc. (collectively “Somni”) and on September 14, 2009, we completed the purchase of the outstanding stock of Avastra Eastern Sleep Centers, Inc. (“Eastern”). Somni and Eastern were purchased from AvastraUSA, Inc. and Avastra Sleep Centres Limited. (collectively “Avastra”). Somni provides diagnostic sleep testing services and treatment for sleep disorders at sleep diagnostic centers in Iowa, Kansas, Minnesota, Missouri, Nebraska and South Dakota. Eastern manages sleep diagnostic in Florida and New York. As purchase consideration for Somni, the Company paid Avastra cash of $5.9 million. As purchase consideration for Eastern, the Company paid Avastra cash of $3.2 million and issued Avastra 752,795 shares of our common stock which had a value of $1.5 million.

The unaudited pro forma condensed combined balance sheet as of September 30, 2009 was prepared as if the acquisitions had occurred on that date and combines the historical consolidated balance sheet of the Company with the unaudited balance sheets of Somni and Eastern as of September 30, 2009. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2009 and the year ended December 31, 2008 were prepared as if the acquisition had occurred on the first day of the period presented and combines the historical consolidated statements of operations of the Company with the unaudited historical consolidated statements of operations of Somni and Eastern.

The unaudited pro forma condensed combined financial statements have been prepared for informational purposes only, to show the effect of the combination of the Company, Somni and Eastern on a historical basis. These financial statements do not purport to be indicative of the financial position or results of operations that would have actually occurred had the business combination been in effect at those dates, nor do they project the expected results of operations or financial position for any future period or date.

The unaudited pro forma condensed combined financial statements do not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition. The purchase price allocation is not finalized, because the Company is still in the process of finalizing our estimates of fair value for property, equipment and intangible assets acquired. Accordingly, the Company has prepared the pro forma adjustments based on assumptions that the Company believes are reasonable but that are subject to change as additional information becomes available and the preliminary purchase price allocation is finalized.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2009


				Historical				Pro Forma		Pro Forma

	Graymark			Somni		Eastern		Adjustments		Combined
								(Notes 2-4)

ASSETS

Cash and cash equivalents	$	3,827,346		$	352,550	$	105,506	$	—	$	4,285,402
Accounts receivable, net		9,439,848			1,014,039		805,120		—		11,259,007
Inventories		8,559,861			73,318		—		—		8,633,179
Other current assets		474,258			16,361		167,087		—		657,706

Total current assets		22,301,313			1,456,268		1,077,713		—		24,835,294

Fixed assets, net		5,059,869			1,035,468		157,109		—		6,252,446
Intangible assets, net		7,701,898			—		—		—		7,701,898
Goodwill		29,694,923			4,930,761		3,657,557		—		38,283,241
Other assets		801,688			132,750		—		—		934,438

Total assets	$	65,559,691		$	7,555,247	$	4,892,379	$	—	$	78,007,317


LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	3,475,025		$	77,337	$	26,585	$	—	$	3,578,947
Accrued liabilities		4,274,457			199,799		72,271		—		4,546,527
Intercompany		(6,991,001	)		2,218,645		4,772,356		—		—
Short-term debt		127,500			—		—		—		127,500
Current portion of long-term debt		3,020,175			24,713		—		—		3,044,888

Total current liabilities		3,906,156			2,520,494		4,871,212		—		11,297,862


Long-term debt, net of current current portion		41,414,178			4,920,699		—		—		46,334,877

Total liabilities		45,320,334			7,441,193		4,871,212		—		57,632,739


Shareholders’ Equity:
Common stock $0.0001 par value, 500,000,000 shares authorized; 28,756,693 issued and outstanding outstanding		2,876			—		—		—		2,876
Paid-in capital		29,175,377			—		—		—		29,175,377
Accumulated deficit		(8,462,358	)		114,054		21,167		—		(8,327,137	)
Deferred compensation		(507,256	)		—		—		—		(507,256	)


Total Graymark Healthcare shareholders’ equity		20,208,639			114,054		21,167		—		20,343,860

Noncontrolling interest		30,718			—		—		—		30,718

Total equity		20,239,357			114,054		21,167		—		20,374,578


Total liabilities and shareholders’ equity	$	65,559,691		$	7,555,247	$	4,892,379	$	—	$	78,007,317

See accompanying notes to unaudited pro forma condensed combined financial statements

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2009


	Historical
	For the Nine Months Ended
	September 30, 2009									Pro Forma			Pro Forma
	Graymark			Somni			Eastern			Adjustments			Combined
										(Notes 2-4)
Revenues	$	76,971,875		$	7,540,661		$	4,145,694		$	(2,289,174	)	$	86,369,056

Costs and Expenses:
Cost of sales and services		55,178,284			3,119,483			1,713,322			(1,713,322	)		58,297,767
Selling, general and administrative		20,159,392			3,647,213			1,584,217			(560,988	)		24,829,834
Change in accounting estimate		2,648,207			—			—			—			2,648,207
Depreciation and amortization		1,575,872			293,182			127,864			—			1,996,918

		79,561,755			7,059,878			3,425,403			(2,274,310	)		87,772,726

Net other (expense)		(1,643,477	)		(116,743	)		(69,129	)		—			(1,829,349	)


Income (loss) from continuing operations , before taxes		(4,233,357	)		364,040			651,162			(14,864	)		(3,233,019	)
Benefit (provision) for income taxes		208,000			(145,616	)		(260,465	)		406,081			208,000

Income (loss) from continuing operations, net of taxes		(4,025,357	)		218,424			390,697			391,217			(3,025,019	)
Discontinued operations, net of taxes		2,805			—			—			—			2,805

Net income (loss)		(4,022,552	)		218,424			390,697			391,217			(3,022,214	)
Less: Net income (loss) attributable to noncontrolling interest		(241,768	)		—			—			—			(241,768	)


Net income (loss) attributable to Graymark Healthcare	$	(3,780,784	)	$	218,424		$	390,697		$	391,217		$	(2,780,446	)


Net loss per share of common stock, basic and diluted	$	(0.13	)										$	(0.10	)


Weighted average number of common shares outstanding, basic and diluted		28,116,089												28,822,006

See accompanying notes to unaudited pro forma condensed combined financial statements

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2008


	Historical									Pro Forma			Pro Forma
	Graymark			Somni			Eastern			Adjustments			Combined
										(Notes 2-4)
Revenues	$	96,621,322		$	9,551,447		$	5,544,843		$	(2,947,088	)	$	108,770,524

Costs and Expenses:
Cost of sales and services		67,803,667			4,180,074			2,342,821			(2,342,821	)		71,983,741
Selling, general and administrative		23,818,864			4,292,453			1,806,400			(444,505	)		29,473,212
Depreciation and amortization		1,571,292			398,976			162,959			—			2,133,227

		93,193,823			8,871,503			4,312,180			(2,787,326	)		103,590,180

Net other (expense)		(2,055,063	)		(85,104	)		(76,111	)		—			(2,216,278	)


Income from continuing operations , before taxes		1,372,436			594,840			1,156,552			(159,762	)		2,964,066
Benefit (provision) for income taxes		(136,000	)		(237,936	)		(462,621	)		63,905			(772,652	)


Income from continuing operations, net of taxes		1,236,436			356,904			693,931			(95,857	)		2,191,414
Discontinued operations, net of taxes		60,932			—			—			—			60,932

Net income		1,297,368			356,904			693,931			(95,857	)		2,252,346
Less: Net income (loss) attributable to noncontrolling interest		552,970			—			—			—			552,970


Net income (loss) attributable to Graymark Healthcare	$	744,398		$	356,904		$	693,931		$	(95,857	)	$	1,699,376


Net income per share of common stock:
Basic	$	0.03											$	0.06

Diluted	$	0.03											$	0.06


Weighted average number of common shares outstanding:
Basic		25,885,628												26,638,423

Diluted		26,102,841												26,855,636

See accompanying notes to unaudited pro forma condensed combined financial statements

NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS

(1) BASIS FOR PRESENTATION

The pro forma condensed combined financial statements present the pro forma effects of the acquisition by Graymark Healthcare, Inc. (“Graymark”) of the outstanding equity ownership interests in somniTech, Inc. and somniCare, Inc. (collectively “Somni”) for $5.9 million in cash the outstanding equity ownership interests in Avastra Eastern Sleep Centers, Inc. (“Eastern”) for $3.2 million in cash and 752,792 shares of Graymark common stock (the “Acquisition”). The Acquisition will be accounted for as a purchase of Somni and Eastern by Graymark using the acquisition method of accounting.

The accompanying unaudited pro forma combining consolidated statements of operations are presented assuming the Acquisition was consummated on the first day of the period presented. The unaudited pro forma combining consolidated balance sheet as of September 30, 2009, is presented assuming the actual date of the Acquisition.

The historical information presented for Graymark (i) as of September 30, 2009 and the nine months then ended, is derived from the unaudited consolidated financial statements contained in our Quarterly Report on Form 10-Q, and (ii) the year ended December 31, 2008, is derived from the audited consolidated financial statements of Graymark contained in our Annual Report on Form 10-K.

The historical information presented for Somni (i) as of and for the nine months ended September 30, 2009, and (ii) the year ended December 31, 2008, is derived from the unaudited financial statements of somniTech, Inc. and somniCare, Inc.

The historical information presented for Eastern (i) as of and for the nine months ended September 30, 2009, and (ii) the year ended December 31, 2008, is derived from the unaudited financial statements of Eastern.

The pro forma financial information presented in the unaudited pro forma combining consolidated financial statements is not necessarily indicative of the financial position and results of operations that would have been achieved had the assets and liabilities been owned by a single corporate entity. The results of operations presented in the unaudited pro forma combining statements of operations are not necessarily indicative of the results of future operations of Graymark following consummation of the Acquisition.

(2) ADJUSTMENTS — THE ACQUISITION:

The accompanying unaudited pro forma consolidated financial statements have been adjusted to give effect to the Acquisition as follows:

	(a)		Income taxes reflect the effect of the historical earnings of Somni and Eastern and the pro forma adjustment for the nine months ended September 30, 2009 to reflect the offset of Somni and Eastern earnings against the losses of Graymark.

	(b)		Revenue, cost of services and selling, general and administrative expenses have been reduced to reflect the management services agreement (“MSA”) operating model that was implemented at Eastern after the Acquisition. Under the MSA, Eastern receives management fee income for operating the respective sleep center and providing additional services to the physician group. The cost of the sleep studies performed and the personnel costs of sleep technicians are born by the physician group that performs the sleep studies.

Since the Acquisition was consummated prior to September 30, 2009, the following post-Acquisition transactions are already reflected in the unaudited pro forma information, including the following:

(a)

The recording of the excess fair value over the net assets acquired (goodwill) of Somni and

Eastern of $4,930,761 and $3,657,557, respectively. The fair values of the assets acquired and liabilities assumed were preliminarily determined to be the net book values previously recorded by Somni and Eastern. Due to the timing of the acquisitions, it was not practical for the fair value appraisals of Somni and Eastern to be completed at the time of this report. Management expects that the final appraisals of Somni and Eastern will result in changes, which could be significant, including the establishment of values for identifiable intangible assets which are not part of the preliminary purchase allocation.

(3) NET INCOME PER SHARE

Pro forma per share calculations for Graymark are based upon the weighted average number of common stock shares assuming the Acquisition occurred on the first day of the period presented.

(4) INCOME TAXES

The provision for income taxes is based on the federal corporate statutory 35% income tax rate, plus an estimated 5% rate for state income taxes.

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