8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 22, 2013

Graymark Healthcare, Inc.

(Exact name of registrant as specified in charter)

Oklahoma	001-34171	20-0180812
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

204 N. Robinson Avenue, Suite 400

Oklahoma City, Oklahoma 73102

(Address of Principal Executive Offices) (Zip Code)

(405) 601-5300

(Registrant’s telephone number, including area code)

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 (see General Instruction A.2. below):

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

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

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

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

Item 1.01. Entry into a Material Definitive Agreement.

On March 29, 2013, Graymark Healthcare, Inc. (“we,” the “company,” or “Graymark”) and our wholly-owned subsidiary, TSH Acquisition, LLC (“TSH”), entered into an Amended and Restated Membership Interest Purchase Agreement (“Amended Purchase Agreement”) with Foundation Healthcare Affiliates, LLC (“Seller”) pursuant to which Graymark and TSH will acquire from Seller (the “Acquisition”) all of the outstanding membership interests of Foundation Surgery Affiliates, LLC (“FSA”) and Foundation Surgical Hospital Affiliates, LLC (“FSHA” and together with FSA, the “Companies” or “Foundation”) as well as assets of the Seller related to the businesses of the Companies. Foundation has equity interests in and manages outpatient surgery centers and surgical hospitals in seven states.

On July 22, 2013, Graymark, TSH and Seller entered into the First Amendment to the Amended Purchase Agreement (the “First Amendment” and together with the Amended Purchase Agreement, as amended, the “Purchase Agreement”).

Pursuant to the Purchase Agreement, in consideration for the Acquisition (the “Consideration”), Graymark will (i) issue to Seller at closing 114,500,000 shares of its Common Stock, (ii) issue to Seller at Closing a demand promissory note to Seller in the aggregate principal amount of $2 million, and (iii) assume certain liabilities and obligations of the Seller. On July 23, 2013, the Company made a $250,000 payment on the $2 million note to Seller.

Purchase Agreement

Pursuant to the Purchase Agreement and subject to the terms and conditions thereof, at the closing Seller will assign all of the membership interests in the Companies to TSH in exchange for the Consideration. The Purchase Agreement contains customary representations, warranties and covenants of Seller including not to engage in certain significant actions prior to closing without the prior written consent of Graymark. Seller has agreed to indemnify us for losses resulting from breaches of their representations, warranties and covenants in the Purchase Agreement. These indemnification obligations are in certain cases limited to claims that in the aggregate exceed a $50,000 “deductible” amount such that claims for indemnification may not be made until the losses equal or exceed that amount.

Simultaneously with the closing of the transactions contemplated by the Purchase Agreement, Graymark will increase the size of its Board of Directors to seven members and intends to appoint Thomas Michaud, Chief Executive Officer of Seller and Dr. Robert Moreno as directors of Graymark effective upon the closing.

The closing of the Acquisition is subject to various conditions, including the receipt of consents from third parties and regulatory clearances. These conditions include the consent of each of Graymark’s secured lender, Arvest Bank, the secured lender to the Seller and certain preferred members of subsidiaries of the Companies. The Purchase Agreement may be terminated at any time prior to closing (i) by mutual consent of Graymark and Seller; (ii) by either Graymark or Seller if the closing of the transaction has not closed by April 30, 2013; or (iii) by either party if the other party is in breach of the Purchase Agreement and the breach is not cured after notice and causes a condition to completion of the transaction to fail.

Ancillary Agreements

Graymark, Seller, Arvest Bank and Mr. Roy Oliver have also entered into a number of additional ancillary agreements at closing.

Preferred Interest Financing Transaction

On March 13, 2013, the Company’s wholly-owned subsidiary, Foundation Health Enterprises, LLC (“FHE”) initiated a private placement offering for up to $15,960,000. The offering is comprised of 152 units of Class B member interests (“FHE Unit”). Each FHE Unit is being offered at $105,000 and entitles the purchaser to one (1) Class B membership interest in FHE, valued at $100,000, and 10,000 shares of the Company’s common stock, valued at $5,000. On July 22, 2013, FHE and the Company completed the sale of 68 FHE Units for total consideration received was $7,140,000.

The FHE Units provide for a cumulative preferred annual return of 9% on the amount allocated to the Class B membership interest. The FHE Units will be redeemed by FHE in four annual installments beginning in July 2014. The first three installments shall be in the amount of $10,000 per FHE Unit and the fourth installment will be in the amount of the unreturned capital contribution and any undistributed preferred distributions. The FHE Units are convertible at the election of the holder at any time prior to the complete redemption into restricted common shares of the Company at a conversion price of $2.00 per share.

The proceeds from the FHE Units were used to fund a portion of the Tyche Transaction described below.

Tyche Transaction

On March 31, 2013, the Company and its wholly-owned subsidiary, TSH Acquisition, LLC (“TSH”) entered into an Asset Purchase Agreement (the “Tyche Agreement”) with Tyche Health Enterprises, LLC (“Tyche”) which was subsequently amended on March 31, 2013 and July 22, 2013. The Tyche Agreement provides for the purchase of the preferred membership interests that Tyche owns in certain subsidiaries of FSHA and FSA under a Membership Interest Purchase Agreement, dated July 17, 2007, between Tyche and Foundation Surgery Holdings, L.L.C. (“FSH”), Foundation Weightwise Holdings, L.L.C. (nka FSHA), Foundation Healthcare Affiliates, L.L.C. (“FHA”) as well as the right to various equity interest in the affiliates of FSH, FSA and FHA (collectively “Foundation”).

The transactions under the Tyche Agreement were closed on July 22, 2013. Under the Tyche Agreement, TSH purchased from Tyche (i) all of Tyche’s right, title and interest in the Membership Interest Purchase Agreement; (ii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSH and the right to various equity interests in the affiliates of FSH; (iii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSHA and the right to various equity interest in the affiliates of FSHA; and (iv) all of Tyche’s right, title and interest in any preferred or non-preferred ownership interest in any Foundation entities that have been acquired as a result of the Membership Interest Purchase Agreement.

Under the Tyche Agreement, TSH paid $11,102,372 to Tyche and Tyche related entities and TSH issued promissory notes totaling $2,339,905 to Tyche and Tyche related entities for total consideration of $13,442,277. The promissory notes bear interest at annual rate of 11.5% and mature on August 1, 2013 with all principal and interest being due at that time.

As further consideration for the Tyche Agreement, the Company issued Tyche and certain Tyche related entities warrants for the purchase of the Company’s common stock. The warrants issued included:

1. Five year warrants for the purchase of a total of 1,937,500 shares of the Company’s common stock at a strike price of $1.00 per share;

2. Seven and one-half year warrants for the purchase of a total of 3,516,204 shares of the Company’s common stock at a strike price of $1.35 per share; and

3. Ten year warrants for the purchase of a total of 2,296,296 shares of the Company’s common stock at a strike price of $1.60 per share.

Item 2.01 Completion of Acquisition or Disposition of Assets.

On July 22, 2013, we closed the Acquisition comprising the outpatient surgery center and surgical center business of FSA and FSHA, respectively. We intend to operate these businesses along with our existing sleep management solutions business.

FSA and FSHA comprise a nationally prominent owner and manager of ambulatory surgery centers (“ASC”(s)) and surgical hospitals with facilities located in Louisiana, Maryland, New Jersey, Ohio, Oklahoma, Pennsylvania and Texas. As of December 31, 2012 Foundation owned interests and/or managed 12 ASCs and four surgical hospitals in partnership with over 400 local physicians. Our facilities are a major national provider of surgical services with approximately 72,000 outpatient and 4,000 inpatient surgical cases performed in them in 2012. We believe that our acquisition and development strategy and operating model will enable us to continue to grow by taking advantage of highly-fragmented markets, an increasing demand for short stay surgery and a need by physicians to forge strategic alliances to meet the needs of the evolving healthcare landscape while also shaping the clinical environments in which they practice.

We typically own a minority ownership in facilities with ownership ranging from 10% to 31% in 13 facilities. However, we own over 51% in two of our larger hospitals located in San Antonio and El Paso, Texas. Our facilities collectively offer a “portfolio” of specialties ranging from relatively intensive specialties such as orthopedics and neurosurgery to low-surgery-intensive specialties such as pediatric ENT (tubes / adenoids), pain management and gastroenterology. Each of our facilities is located in freestanding buildings or medical office buildings. Our average ASC has approximately 16,000 square feet of space with four operating rooms, as well as ancillary areas for preparation, recover, reception and administration. Our surgery centers are normally open weekdays from 7:00 a.m. to approximately 5:00 p.m. or until the last patient is discharged. Our surgical hospitals have from 10 to 40 beds and average seven operating rooms, ranging in size from 40,000 to 126,000 square feet and are open 24 hours a day, 365 days a year.

All of our ASC and surgical hospital facilities are licensed at the state level as either ASCs or hospitals, participate within the Medicare program and are accredited by the Accreditation Association for Ambulatory Healthcare (AAAHC), Det Norske Veritas (DNV) or the Joint Commission. We recognize that accreditation is a crucial quality benchmark for payors since many managed care organizations will not contract with a facility until it is accredited. We believe that our historical success in obtaining and retaining accreditation for our facilities reflects its commitment to providing high quality care in its facilities.

Generally, our ASC and surgical hospital facilities are owned and operated by limited partnerships or limited liability companies in which ownership interests are also held by local physicians who are on the medical staffs of the facilities. The facilities’ partnership and limited liability company agreements typically provide for the monthly or quarterly pro rata distribution of cash equal to net profits from operations, less amounts held in reserve for expenses and working capital. Even where we own a minority of the interests in a facility, the partnership or limited liability company agreements generally grant us representation on the facility’s governing board and ensure our participation in fundamental decisions. Our influence over the businesses of our facilities is enhanced by the management agreements which we possess with such facilities.

Our ASC and surgical hospital facilities depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for the preponderance of the services rendered to patients. Our ASC and surgical hospital facilities derive approximately 25% of their revenues from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles. Although our ASC and surgical hospital facilities receive only a quarter of their revenues from governmental programs, private payors typically follow the method in which the government reimburses healthcare providers. Under the government’s methodology our ASC and surgical hospital facilities are reimbursed for the performance of services through the payment of facility fees which vary according to whether the facility is an ASC or a hospital and the type of procedure that is performed. ASCs are reimbursed through the payment of a composite “ASC rate” which includes payment for most of the expenses associated with the performance of a procedure such as nursing services, supplies, and staffing costs. The reimbursement rates for inpatient hospital services are determined using Medicare severity diagnosis related groups which are intended to compensate hospitals according to the estimated intensity of hospital resources necessary to furnish care for a particular diagnosed illness. Hospitals are reimbursed for outpatient procedures in a manner similar to ASCs except that the methodologies employed to calculate reimbursement generally result in hospitals being reimbursed in this setting at a higher rate for outpatient procedures than free-standing ASCs.

The reimbursement rates payable to hospitals and ASCs are subject to frequent adjustment. In addition, the reimbursement methodologies contained in the Patient Protection and Affordable Care Act (the “ACA”) are still being evaluated and are a source of uncertainty. Physicians are typically paid separately for their professional services in both ASCs and hospitals.

Our revenues from the ASC and surgical hospital facilities are derived from (i) the pro rata distributions we receive on our ownership in the facilities, and (ii) management fees that we receive from these facilities. Such management fees are generally calculated as a percentage of the monthly net revenues. We own equity interests in all of our ASC and surgical hospital facilities except the Lake Surgery Center in Baton Rouge, Louisiana which we manage. We possess management agreements with all of our ASC and surgical hospital facilities except for the Houston Orthopedic Surgical Hospital in Houston, Texas in which we own 20% of the interest.

Employees

As of December 31, 2012, FSA, FSHA and their subsidiaries employed approximately 1,330 persons, approximately 980 of whom were full-time employees and 350 of whom were part-time employees. Of these employees, approximately 90 are corporate employees, primarily based at the FSA and FSHA headquarters in Oklahoma City, Oklahoma. None of these employees are represented by a union. We believe the relationship with these employees is good.

Foundation Surgery Affiliates

Surgery Center Locations

The following table lists certain information relating to the Company’s ASCs:

Facility Location	Specialty	Date of Acquisition or Affiliation	Number of Operating Rooms	Percentage Owned by Foundation
Nacogdoches, Texas	Multi-specialty	November 2000	4	12.5%
Huntingdon Valley, Pennsylvania	Multi-specialty	December 2003	4	20.0%
Mercerville, New Jersey	Multi-specialty	December 2004	3	10.0%
Oklahoma City, Oklahoma	Multi-specialty	January 2006	5	20.0%
Middleburg Heights, Ohio	Multi-specialty	March 2006	4	10.0%
Chevy Chase, Maryland	Multi-specialty	February 2010	6	18.0%
Cumberland Valley, Maryland	Multi-specialty	February 2010	1	31.9%
Baton Rouge, Louisiana	Multi-specialty	February 2010	6	Managed Facility
Frederick, Maryland	Multi-specialty	April 2010	4	19.6%
Houston, Texas	Multi-specialty	January 2012	4	10.0%
Houston, Texas	Multi-specialty	March 2012	4	10.0%

Foundation Surgical Hospital Affiliates

Surgical Hospital Locations

The following table lists certain information relating to the Company’s surgical hospitals:

Facility Location	Specialty	Date of Acquisition or Affiliation	Number of Operating Rooms	Percentage Owned by Foundation
Houston, Texas	Multi-specialty	February 2006	10	20.0%
San Antonio, Texas	Multi-specialty	September 2007	4	51.0%
Sherman, Texas	Multi-specialty	November 2010	10	20.0%
El Paso, Texas	Multi-specialty	October 2012	4	52.6%

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

Arvest Bank

On July 22, 2013, the Company’s subsidiaries, SDC Holdings, LLC and ApothecaryRx, LLC (collectively the “Borrowers”), the Company and Stanton Nelson (the “Guarantor”) entered into a Second Amended and Restated Loan Agreement (the “New Loan Agreement”) and an Amended and Restated Promissory Note (the “New Note”) with Arvest Bank. The Company, Borrowers, Guarantor and other guarantors previously entered into the Amended and Restated Loan Agreement dated effective December 17, 2010, as amended by the First Amendment to Loan Agreement dated January 1, 2012, the Second Amendment to Loan Agreement dated effective June 30, 2012, and the Third Amendment to Loan Agreement dated effective October 12, 2012 (the “Prior Agreement”). Under the Prior Agreement, the Company and Borrowers are indebted to Arvest Bank under the Amended and Restated Promissory Note, in the original principal amount of $15,000,000 dated June 30, 2010 and the Second Amended and Restated Promissory Note, in the original principal amount of $30,000,000, dated June 30, 2010 (the “Prior Notes”). Arvest Bank, the Company, the Borrowers and the Guarantor have agreed to restructure the loan evidenced by the Prior Notes and the Prior Agreement. As of July 22, 2013, the outstanding principal amount of the New Note was $10,691,261.71.

Personal Guaranty. Under the New Loan Agreement, the Guarantor unconditionally guarantees payment of Borrower’s obligations owed to Arvest Bank and Borrower’s performance under the New Loan Agreement and related documents. Guarantor’s liability is limited to $2,919,000.

Maturity Dates. The maturity date of the New Note is December 31, 2013.

Interest Rate. The outstanding principal amount of the New Note bears interest at the greater of the prime rate as reported in the “Money Rates” section of The Wall Street Journal (the “WSJ Prime Rate”) or 6% (“Floor Rate”).

Interest and Principal Payments. Provided the Borrowers are not in default, the New Note is payable in monthly payments of accrued and unpaid interest. The entire unpaid principal balance of the New Note plus all accrued and unpaid interest thereon will be due and payable on December 31, 2013.

Use of Proceeds. All proceeds of the New Note were used solely for the refinancing of the existing indebtedness owed to Arvest Bank; and other costs we incurred by Arvest Bank in connection with the preparation of the loan documents, subject to approval by Arvest Bank.

Collateral. Payment and performance of our obligations under the Arvest Credit Facility are secured by the assets of the Borrowers and the limited personal guaranty of the Guarantor. If we sell any assets which are collateral for the New Note, then subject to certain exceptions and with the consent of Arvest Bank, such sale proceeds must be used to reduce the amounts outstanding to Arvest Bank.

Default and Remedies. In addition to the general defaults of failure to perform our obligations and those of the Guarantor, default also includes collateral casualties, misrepresentation, bankruptcy, entry of a judgment of $50,000 or more, or failure of first liens on collateral. In the event a default is not cured within 10 days or in some case five days following notice of the default by Arvest Bank (and in the case of failure to perform a payment obligation for three times with notice), Arvest Bank will have the right to declare the outstanding principal and accrued and unpaid interest immediately due and payable.

Deposit Account Control Agreement. The Company has entered into a Deposit Control Agreement (“Deposit Agreement”) with Arvest Bank and Valliance Bank covering the deposit accounts that we have at Valliance Bank. The Deposit Agreement requires Valliance Bank to comply with instructions originated by Arvest Bank directing the disposition of the funds held by us at Valliance Bank without our further consent. Without Arvest Bank’s consent, we cannot close any of our deposit accounts at Valliance Bank or open any additional accounts at Valliance Bank. Arvest Bank may exercise its rights to give instructions to Valliance Bank under the Deposit Agreement only in the event of an uncured default under the Loan Agreement, as amended.

Debt Service Coverage Ratio. Based on the latest four rolling quarters, the Company has agreed to continuously maintain a “Debt Service Coverage Ratio” of not less than 1.25 to 1. Debt Service Coverage Ratio is, for any period, the ratio of:

• the net income of Graymark Healthcare (i) increased (to the extent deducted in determining net income) by the sum, without duplication, of our interest expense, amortization, depreciation, and non-recurring expenses as approved by Arvest, and (ii) decreased (to the extent included in determining net income and without duplication) by the amount of minority interest share of net income and distributions to minority interests for taxes, if any, to

• the annual debt service including interest expense and current maturities of indebtedness as determined in accordance with generally accepted accounting principles.

If we acquire another company or its business, the net income of the acquired company and the new debt service associated with acquiring the company may both be excluded from the Debt Service Coverage Ratio, at our option.

Positive EBITDA. Beginning on March 31, 2013, and on the last day of each quarter thereafter, the Company’s EBITDA (“earnings before interest, taxes, depreciation and amortization”) must be positive for such immediately ended quarter. “Positive EBITDA” for any period means the net income for that period: (a) plus the following for such period to the extent deducted in calculating such net income, without duplication: (i) interest expense, (ii) all income tax expense; (iii) depreciation and amortization expense; and (iv) non-cash charges constituting intangible impairment charges, equity compensation and fixed asset impairment charges; (b) but, and in all cases, excluding from the calculation of EBITDA: (i) any extraordinary items (as determined in accordance with GAAP); and (ii) onetime or non-recurring gains or losses associated with the sale or disposition of any business, asset, contract or lease.

Compliance with Financial Covenants. Arvest Bank has waived the financial covenants related to the Company’s Debt Service Coverage Ratio, Positive EBITDA and minimum net worth through December 31, 2013 which is the maturity date of the New Note.

Roy T. Oliver Note

On July 22, 2013, the Company issued a promissory note in the original principal amount of $5,648,290 in favor of Roy T. Oliver (the “Note”). The principal amount of the Note represents the amount Mr. Oliver, a Guarantor under the Prior Agreement, paid to Arvest Bank in full satisfaction of his limited guaranty. Mr. Oliver is not a guarantor of the New Note.

The Note bears interest at an annual rate of 8.0% and is unsecured and subordinated to the New Loan Agreement. In the event the Company defaults on the Note, and the event of default is not cured in a timely manner, the lender has the right to declare the outstanding principal and accrued and unpaid interest immediately due and payable. Events of default under the Note include the failure of the Company to pay the Note when due, the Company’s assignment for the benefit of creditors or admission of its inability to pay debts as they become due, the commencement of bankruptcy or similar proceedings by or against the Company. or an event of default occurs under the Loan Agreement. The Note matures on July 31, 2013 provided that, if the New Loan Agreement as in effect on such maturity date does not permit the Company to repay the Note, then the maturity date is continued until such time as the Arvest loan is refinanced or the provisions of the Loan Agreement permits repayment.

See Item 3.02 below.

Valliance Loan Agreement

On July 22, 2013, the Company’s subsidiary, FHE executed a loan agreement and a promissory note in the amount of $5,100,000 payable to Valliance Bank. The note bears interest at annual rate of 10% and FHE is required to make quarterly payments of interest beginning on October 15, 2013. FHE is required to make one principal payment of $728,571 on August 15, 2014. The note matures on July 22, 2015 at which time all outstanding principal and accrued interest is due. The proceeds of the note, net of a $100,000 loan origination fee, were used to help fund FHE’s purchase of the preferred interests of FHA and FSHA from Tyche. The loan agreement requires FHE to prepay a portion of the loan upon the completion of a sale of FSHA’s equity interest in a hospital located in Sherman, TX. The promissory note is secured by the Company’s equity interests in TSH Acquisition, LLC. Valliance Bank is controlled by Mr. Roy T. Oliver, one of our greater than 5% shareholders and affiliates. Non-controlling interests in Valliance Bank are held by Mr. Stanton Nelson, the Company’s chief executive officer and Mr. Joseph Harroz, Jr., a director of the Company. Mr. Nelson and Mr. Harroz also serve as directors of Valliance Bank.

Legacy Bank

On July 22, 2013, as a condition to Legacy Bank providing its consent to the Company’s purchase of FSA and FSHA required under its existing FSA and FSHA loan agreements, the Company, its subsidiary TSH (the “Guarantor”); and Seller, and its subsidiaries, FSA, FSHA, FSH, Foundation Surgery Management, LLC, Foundation Surgical Hospital Holdings, LLC and Foundation Surgical Hospital Management, LLC (collectively the “FHA Group”) entered into a Consent, Ratification, Acknowledgement and Amendment to Loan Documents Agreement (the “Consent”) with Legacy Bank. As part of the Consent, Guarantor entered into a Loan Guaranty Agreement (‘Guaranty”) and Collateral Pledge Agreement (“Pledge’) with Legacy Bank.

In the Consent, the FHA Group ratified and acknowledged existing Legacy loans, the loan balances, the existing loan covenants and further agreed to additional loan covenants applicable to all of these Legacy loans. In the Guaranty, the Guarantor agreed to guarantee the payment of certain of these existing Legacy loans as detailed below. In the Pledge, Guarantor granted Legacy Bank a security interest in all of its membership interests in FSA, and FSHA, as collateral on the Guaranty.

FHA Group Loans with Legacy Bank. The FHA Group Loans with Legacy Bank and the balances are set forth in Schedule 1 of the Consent and lists the following balances as of July 18, 2005:

1. Loan dated 2/5/2010 maturing 5/20/2013** with a balance of $3,712,725.42*;

2. Loan dated 9/7/2010 maturing 6/7/2014 with a balance of $896,000*;

3. Loan dated 9/7/2010 maturing 9/7/2015 with a balance of $479,995.94*;

4. Loan dated 9/7/2010 maturing 9/7/2015 with a balance of $1,925,413.75*;

5. Loan dated 12/30/2011 maturing 12/30/2016 with a balance of $734,708.73*;

6. Loan dated 3/21/2012 maturing 3/21/2014with a balance of $834,272.18;

7. Loan dated 3/21/2012 maturing 3/21/2014with a balance of $833,854.20;

8. Loan dated 8/30/2012 maturing 9/30/2013 with a balance of $804,000*;

9. Loan dated 3/19/2013 maturing 3/18/2014 with a balance of $2,010,027*;

10. Loan dated 9/7/2006 maturing 2/17/2016 with a balance of $292,912.18*;

11. Loan dated 2/22/2013 maturing 3/15/2023 with a balance of $2,913,698.40; and,

12. Loan dated 6/26/2012 maturing 6/26/2022 with a balance of $13,955,707.26.

* Guaranteed by TSH

** Successive short term extensions granted through July 5, 2013, and August 1, 2013, with a long term 36 month extension pending.

Additional Loan Covenants. The additional loan covenants that apply to the FHA Group Loans with Legacy Bank are set forth in Schedule 4 of the Consent and provide in pertinent part as follows:

1. Distributions: FSA and FSHA are permitted to make distributions as follows:

a. Distributions solely between FSA and FSHA are permitted.

b. FSA and FSHA may make combined monthly distributions to TSH of the lesser of 80% of Graymark’s regular monthly overhead or $100,000.

c. FSA and FSHA may make quarterly distributions to TSH in the amount of TSH’s quarterly interest payment due on its preferred debt.

d. FSA and FSHA may make monthly distributions to TSH to pay FHA assumed debt up to $70,000 per month;

e. Such distributions may be made as long as immediately following a distribution the following conditions exist:

i. on a combined basis FSA and FSHA maintain the global Debt Service Coverage Ratios by the dates as follows: 1.0:1 by June 30, 2013; 1.05:1 by September 30, 2013; 1/1:1 by December 31, 2013; 1.15:1 by March 31, 2014; and 1.2:1 by June 30, 2014;

ii. the distribution shall not exceed FSA’s and FSHA’s combined income for the previous month;

iii. there exists no default under the Consent or any of the loan documents; and,

iv. all distributions are included as post-net income on all quarterly financial statements.

f. However, until such time as Loan #9952640 has been paid in full, FSA and FSHA may make combined monthly distributions to TSH of the lesser of 80% of Graymark’s regular monthly overhead or $115,000 so long as immediately following a distribution, all of the above conditions exist.

2. Debt Service Coverage Ratio; FSA and FSHA shall maintain the following global Debt Service Ratios:1.0:1 by June 30, 2013; 1.05:1 by September 30, 2013; 1/1:1 by December 31, 2013; 1.15:1 by March 31, 2014; and 1.2:1 by June 30, 2014

3. FSA and FSHA maintain a Minimum Tangible Net Worth (“MTNW”) for the third quarter ending September 30, 2013, of at least the 2013 second quarter MNTW ($11,127,023) plus 50% of FSA’s and FSHA’s 2013 combined third quarter net income gain.

4. Limitation on FSA or FSHA or their respective subsidiaries from incurring, assuming, or guaranteeing any indebtedness without consent of Legacy Bank with exceptions for renewals or increases of existing loans, current liabilities for taxes and assessments incurred in the ordinary course of business, indebtedness with respect to current accounts payable incurred in the ordinary course of business, and existing indebtedness of FSA, FSHA and their subsidiaries as reflected in their financial statements as of May 31, 2013.

5. Limitation on TSH, on becoming directly or indirectly liable for any debts of subsidiary SDC Holdings, LLC (“SDC”).

6. TSH’s right to receive distributions from FSA and FSHA are subordinated to the loan covenants with Legacy Bank.

7. FSA, FSHA, and TSH shall complete and deliver to Legacy Bank a Compliance Certificate each month.

Loan Guaranty Agreement. Under the Guaranty certain of the FHA Group Loans with Legacy Bank are guaranteed by TSH.

Collateral Pledge Agreement. Under the Pledge, TSH has granted Legacy Bank a security interest in all of TSH’s membership interests in FSA and FSHA.

Item 2.05 Costs Associated with Exit or Disposal Activities.

During July 2013, the Company closed four of its sleep diagnostic and therapy facilities and implemented a plan to close a fifth location. The facilities are located in Oklahoma and Georgia and are being closed because the revenue from these facilities has not met expectations and is not adequate to offset the fixed operating costs of these locations.

The Company expects to record restructuring charges in connection with the closure of these facilities with respect to the remaining lease obligations for the facilities, severance payments to affected employees and other write-downs. The remaining lease obligations and severance payments are estimated to be approximately $132,000 and $56,000, respectively, and will be recorded in the third quarter of 2013. All cash payments related to the severance costs are expected to be paid during the third quarter of 2013. The cash payments for the remaining lease obligations will continue for the life of the respective leases which extend through September 2014.

On July 17, 2013, the Company implemented a plan to sell certain sleep diagnostic and therapy facilities. The facilities identified as held for sale were selected because the revenue from these facilities have not met expectations and are not adequate to offset fixed operating costs. If a sale of these facilities cannot be achieved within an acceptable time frame, then these facilities will be closed. The time frame for achieving a sale or closing the sites range from July 31, 2013 to August 31, 2013. The facilities identified are located in Oklahoma, Texas, Nevada, Kansas, Missouri and Iowa.

As a result of identifying these sites as held for sale, the related assets, liabilities, results of operations and cash flows of the identified sites will be classified as discontinued operations in the Company’s consolidated financial statements.

Item 3.02 Unregistered Sales of Equity Securities

FHA. On July 22, 2013, in connection with the Acquisition, we issued 114,500,000 shares of common stock to Foundation Healthcare Affiliates, LLC, which represents on a post-transaction basis, approximately 70% of our outstanding common stock. We issued these shares in consideration of the acquisition of the membership interests of Foundation Surgery Affiliates, LLC and Foundation Surgical Hospital Affiliates, LLC. No underwriters were involved.

Loan Participation. On July 22, 2013, in conjunction with the New Loan Agreement with Arvest Bank, we entered into a Participation Agreement with Arvest Bank in which we purchased a $6,000,000 participation in the New Note from Arvest Bank in exchange for 13,333,333 shares of the our common stock. No underwriters were involved.

Oliver Debt Conversion. On August 31, 2012, December 31, 2012, March 1, 2013, April 1, 2013 and July 22, 2013, the Company executed promissory notes with Mr. Roy T. Oliver in the amount of $1,184,808, $351,710, $485,082, $351,470 and $5,648,290, respectively, for a total of $8,021,360 (collectively referred to as the “Oliver Notes”). The Company used the proceeds from the notes to fund its payment obligations to Arvest Bank. On July 22, 2013, the Company issued Mr. Oliver 17,970,295 shares of common stock for full satisfaction of the Oliver Notes including principal and accrued interest owed thereon of $114,263. No underwriters were involved.

Preferred Interest Financing Transaction. On July 22, 2013, in connection with the Preferred Interest Financing Transaction, the sale by our subsidiary FHE and the issuance of 68 FHE Units, we issued 680,000 shares of common stock to the purchasers of the FHE Units. In addition, the FHE Units are convertible into shares of our common stock at the option of the holder at a conversion price of $2.00 per share or currently 3,400,000 shares of our common stock. If all 152 FHE Units are issued, we would issue, in the aggregate 1,520,000 shares of restricted stock and the 152 FHE Units would be convertible for up to 7,600,000 shares of our common stock. No underwriters were involved.

Tyche Transaction. On July 22, 2013, in connection with the purchase of membership interests we issued to Tyche Health Enterprises, LLC and related entities the following warrants exercisable for our common stock: (i) five year warrants for the purchase of a total of 1,937,500 shares of our common stock at a strike price of $1.00 per share; (ii) seven and one-half year warrants for the purchase of a total of 3,516,204 shares of our common stock at a strike price of $1.35 per share; and (iii) ten year warrants for the purchase of a total of 2,296,296 shares of the Company’s common stock at a strike price of $1.60 per share. No underwriters were involved.

On July 22, 2013, after consummation of the transactions disclosed in this Current Report, the Company had outstanding 163,203,276 shares of its common stock.

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On July 22, 2013 and in connection with the closing of the Acquisition, Jamie Hopping and Dr. S. Edward Dakil resigned from our Board of Directors and Thomas Michaud and Dr. Robert Moreno were elected by the Board. Messrs. Michaud and Moreno have not been appointed to any committees of the Board. Mr. Michaud is the Chief Executive Officer of Seller from which we acquired the surgery center and surgical hospital businesses.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

Exhibit No.	Description
99.1+	Audited Consolidated Financial Statements of Foundation Surgery Affiliates, LLC
99.2+	Unaudited Condensed Consolidated Financial Statements of Foundation Surgery Affiliates, LLC
99.3+	Unaudited Pro Forma Condensed Combined Financial Information

+ Filed herewith.

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.
Date: November 13, 2013	By:	/S/ STANTON NELSON
		Stanton Nelson
		Chief Executive Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1+	Audited Consolidated Financial Statements of Foundation Surgery Affiliates, LLC
99.2+	Unaudited Condensed Consolidated Financial Statements of Foundation Surgery Affiliates, LLC
99.3+	Unaudited Pro Forma Condensed Combined Financial Information

+ Filed herewith.

EX-99.1

Exhibit 99.1

FOUNDATION SURGERY AFFILIATES, LLC

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2012 and 2011		F-3
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011		F-4
Consolidated Statements of Member’s Equity (Deficit) for the Years Ended December 31, 2012 and 2011		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011		F-6
Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Member

of Foundation Surgery Affiliates, LLC

We have audited the accompanying consolidated balance sheets of Foundation Surgery Affiliates, LLC and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, member’s equity (deficit) 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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foundation Surgery Affiliates, LLC and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Hein & Associates LLP

Denver, Colorado

November 13, 2013

F-2

FOUNDATION SURGERY AFFILIATES, LLC

Consolidated Balance Sheets

As of December 31, 2012 and 2011

	2012			2011
ASSETS
Cash and cash equivalents	$	2,524,417		$	981,105
Accounts receivable, net of allowances for doubtful accounts of $1,659,337 and $1,353,710, respectively		6,849,055			4,427,107
Receivables from affiliates		1,045,485			1,009,094
Supplies inventories		1,943,284			807,961
Prepaid and other current assets		2,416,136			1,114,497
Total current assets		14,778,377			8,339,764
Property and equipment, net		9,403,853			4,247,892
Equity method investments in affiliates		7,013,611			8,814,315
Intangible assets, net		10,270,858			2,759,428
Goodwill		1,154,528			—
Other assets		126,559			1,135,559
Total assets	$	42,747,786		$	25,296,958
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Liabilities:
Accounts payable	$	10,596,333		$	4,030,509
Accrued liabilities		5,585,180			2,431,910
Preferred member dividends payable		3,549,670			2,748,513
Short-term debt		2,007,597			34,180
Current portion of long-term debt		5,971,339			5,145,149
Total current liabilities		27,710,119			14,390,261
Long-term debt, net of current portion		11,532,751			10,040,202
Other liabilities		5,773,638			3,675,041
Total liabilities		45,016,508			28,105,504
Preferred member interest		11,072,465			11,072,465
Commitments and contingencies (Note 9)
Member’s Deficit:
Foundation Surgery Affiliates member’s deficit:
Paid-in capital		3,453,471			5,300,913
Accumulated deficit		(14,744,688	)		(17,198,596	)
Total Foundation Surgery Affiliates member’s deficit		(11,291,217	)		(11,897,683	)
Noncontrolling interests		(2,049,970	)		(1,983,328	)
Total member’s deficit		(13,341,187	)		(13,881,011	)
Total liabilities, preferred member interest and member’s deficit	$	42,747,786		$	25,296,958

See Accompanying Notes to Consolidated Financial Statements

F-3

FOUNDATION SURGERY AFFILIATES, LLC

Consolidated Statements of Operations

For the Years Ended December 31, 2012 and 2011

	2012			2011
Revenues:
Patient services	$	38,240,925		$	31,114,259
Management fees from affiliates		7,945,061			6,546,895
Equity in earnings of affiliates		6,927,466			4,917,144
Other revenue		1,070,572			347,172
Provision for doubtful accounts		(966,420	)		(1,704,811	)
Revenues		53,217,604			41,220,659
Operating Expenses:
Salaries and benefits		15,659,561			9,840,337
Supplies		11,114,752			9,249,538
Other operating expenses		18,709,965			17,822,082
Impairment of equity investment in affiliate		200,000			—
Depreciation and amortization		2,593,969			2,191,473
Total operating expenses		48,278,247			39,103,430
Operating income		4,939,357			2,117,229
Other Income (Expense):
Interest expense, net		(1,263,797	)		(1,314,613	)
Gain (loss) on sale of equity investments in affiliates		(173,499	)		2,917,925
Other income (expense)		273,699			188,310
Net other (expense)		(1,163,597	)		1,791,622
Net income		3,775,760			3,908,851
Less: Net income attributable to noncontrolling interests		46,867			(418,834	)
Net income attributable to Foundation Surgery Affiliates	$	3,728,893		$	4,327,685

See Accompanying Notes to Consolidated Financial Statements

F-4

FOUNDATION SURGERY AFFILIATES, LLC

Consolidated Statements of Member’s Equity (Deficit)

For the Years Ended December 31, 2012 and 2011

	Paid-in Capital			Accumulated Deficit			Noncontrolling Interests
Balances, January 1, 2011	$	5,300,852		$	(20,251,296	)	$	(1,477,240	)
Net income		—			4,327,685			—
Net loss attributable to noncontrolling interests		—			—			(418,834	)
Preferred member dividends		—			(1,274,985	)		—
Distributions to noncontrolling interests		—			—			(93,504	)
Contributions from noncontrolling interests		—			—			6,250
Distributions from member		61			—			—
Balances, December 31, 2011		5,300,913			(17,198,596	)		(1,983,328	)
Net income		—			3,728,893			—
Net income attributable to noncontrolling interests		—			—			46,867
Preferred member dividends		—			(1,274,985	)		—
Distributions to noncontrolling interests		—			—			(126,009	)
Contributions from noncontrolling interests		—			—			12,500
Distributions to member		(1,847,442	)		—			—
Balances, December 31, 2012	$	3,453,471		$	(14,744,688	)	$	(2,049,970	)

See Accompanying Notes to Consolidated Financial Statements

F-5

FOUNDATION SURGERY AFFILIATES, LLC

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2012 and 2011

	2012			2011
Operating activities:
Net income	$	3,775,760		$	3,908,851
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,593,969			2,191,473
Impairment of equity investment in affiliate		200,000			—
(Gain) loss on sale of equity investment in affiliates		173,499			(2,917,925	)
Provision for doubtful accounts		966,420			1,704,811
Equity in earnings of affiliates		(6,927,466	)		(4,917,144	)
Changes in assets and liabilities, net of acquisitions –
Accounts receivable, net of provision for doubtful accounts		(1,574,044	)		109,938
Receivables from affiliates		(36,391	)		636,094
Supplies inventories		(195,639	)		30,654
Prepaid and other current assets		(687,779	)		(566,052	)
Other assets		1,009,000			(107,656	)
Accounts payable		1,028,196			(651,456	)
Accrued liabilities		983,638			(1,151	)
Other liabilities		(699,938	)		540,399
Net cash provided by (used in) operating activities		609,225			(39,164	)
Investing activities:
Cash received in business acquisition		193,314			—
Purchase of businesses		(309,048	)		—
Purchase of property and equipment		(1,290,651	)		(215,779	)
Disposal of property and equipment		—			17,871
Sale of equity investments in affiliates		1,665,266			3,401,049
Purchase of equity investments in affiliates		(200,000	)		—
Purchase of management agreements		—			(1,000,000	)
Distributions from affiliates		6,889,405			4,545,826
Net cash provided by investing activities		6,948,286			6,748,967
Financing activities:
Debt proceeds		1,243,596			1,974,756
Debt payments		(4,713,016	)		(7,751,646	)
Preferred member dividends		(583,828	)		(396,630	)
Distributions to noncontrolling interests		(126,009	)		(93,504	)
Contributions from noncontrolling interests		12,500			6,250
Distributions from (to) member		(1,847,442	)		61
Net cash used in financing activities		(6,014,199	)		(6,260,713	)
Net change in cash and cash equivalents		1,543,312			449,090
Cash and cash equivalents at beginning of year		981,105			532,015
Cash and cash equivalents at end of year	$	2,524,417		$	981,105
Supplemental Disclosures:
Cash paid for interest expense	$	1,387,135		$	1,253,325

See Accompanying Notes to Consolidated Financial Statements

F-6

FOUNDATION SURGERY AFFILIATES, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2012 and 2011

Note 1 – Nature of Business

Foundation Surgery Affiliates, LLC (the “Company”) is organized under the laws of the state of Nevada. The Company’s sole member is Foundation Healthcare Affiliates, LLC (“FHA”). The Company owns non-majority interests in ambulatory surgery centers (“ASCs” and “Affiliates”), organized as limited liability partnerships and limited liability companies, located in Texas, Oklahoma, Louisiana, Pennsylvania, New Jersey, Maryland and Ohio. The Company, through its consolidated variable interest entity, Foundation Surgical Hospital Affiliates, LLC (“FSHA”), owns controlling and noncontrolling interests in surgical hospitals located in Texas. The Company determined that it was the primary beneficiary of FSHA because of its ability to direct the key activities of FSHA and its funding of the operations of FSHA including the pledging of assets to secure the borrowings of FSHA. The Company provides management services to a majority of its Affiliates under the terms of various management agreements.

As of December 31, 2012, the Company had an accumulated deficit of $14.7 million and a working capital deficiency of $12.9 million. During 2012, the Company generated net income attributable to FSA of $3.7 million and generated cash flow from operating activities of $0.6 million. During 2013, the Company has entered into several transactions, which are detailed in Note 12 – Subsequent Events that have positively impacted the Company’s working capital deficiency. In addition, management expects to refinance, by the end of the first quarter of 2014, a significant portion of the Company’s long-term debt obligations. Management expects that the Company will be able to significantly reduce its annual debt service payments as part of the refinancing; however, there is no assurance that management will be successful in completing the debt refinancing.

Note 2 – Summary of Significant Accounting Policies

Consolidation – The accompanying consolidated financial statements include the accounts of Foundation Surgery Affiliates, LLC and its wholly owned, majority owned and controlled subsidiaries. In addition, a variable interest entity (“VIE”), FSHA, has been consolidated as the Company is the primary beneficiary of FSHA. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company accounts for its investments in Affiliates in which the Company exhibits significant influence, but not control, in accordance with the equity method of accounting. The Company does not consolidate its equity method investments, but rather measures them at their initial costs and then subsequently adjusts their carrying values through income for their respective share of the earnings or losses during the period. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the companies and records reductions in carrying values when necessary.

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 and accounts receivable – The Company recognizes revenues in the period in which services are performed. Accounts receivable primarily consist of amounts due from third-party payors and patients. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Amounts the Company receives for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as health maintenance organizations, preferred provider organizations and other private insurers are generally less than the Company’s established billing rates. Additionally, to provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Accordingly, the revenues and accounts receivable reported in the Company’s consolidated financial statements are recorded at the net amount expected to be received.

F-7

During the years ended December 31, 2012 and 2011, the Company’s revenue payor mix was as follows:

	2012			2011
Medicare and Medicaid		21	%		19	%
HMOs, PPOs and other private insurers		45	%		48	%
Private-pay		4	%		4	%
Management fees from Affiliates		15	%		16	%
Equity in earnings of investments in Affiliates		13	%		12	%
Other		2	%		1	%

Contractual Discounts and Cost Report Settlements

The Company derives a significant portion of its revenues from Medicare, Medicaid and other payors that receive discounts from its established billing rates. The Company must estimate the total amount of these discounts to prepare its consolidated financial statements. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. The Company estimates the allowance for contractual discounts on a payor-specific basis given its interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. Changes in estimates related to the allowance for contractual discounts affect revenues reported in the Company’s accompanying consolidated statements of operations.

Cost report settlements under reimbursement agreements with Medicare and Medicaid are estimated and recorded in the period the related services are rendered and are adjusted in future periods as final settlements are determined. There is a reasonable possibility that recorded estimates will change by a material amount in the near term. There was no adjustment for estimated cost report settlements in 2012 or 2011. The net cost report settlements due to the Company and included as a receivable under the caption “Prepaid and other current assets” in the accompanying consolidated balance sheets was approximately $3,500 at December 31, 2012. The net cost report settlements due from the Company included as a current liability under the caption “Accrued liabilities” in the accompanying consolidated balance sheets, were $0.3 million at December 31, 2011. The Company’s management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs.

Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the Company’s financial statements. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs.

Provision and Allowance for Doubtful Accounts

To provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. The primary uncertainty lies with uninsured patient receivables and deductibles, co-payments or other amounts due from individual patients.

F-8

The Company has an established process to determine the adequacy of the allowance for doubtful accounts that relies on a number of analytical tools and benchmarks to arrive at a reasonable allowance. No single statistic or measurement determines the adequacy of the allowance for doubtful accounts. Some of the analytical tools that the Company utilizes include, but are not limited to, the aging of accounts receivable, historical cash collection experience, revenue trends by payor classification, revenue days in accounts receivable, the status of claims submitted to third party payors, reason codes for declined claims and an assessment of the Company’s ability to address the issue and resubmit the claim and whether a patient is on a payment plan and making payments consistent with that plan. Accounts receivable are written off after collection efforts have been followed in accordance with the Company’s policies.

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 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, which could have a material impact on the Company’s operating results and cash flows in subsequent periods. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded.

The patient and their third party insurance provider typically share in the payment for the Company’s products and services. The amount patients are responsible for includes co-payments, deductibles, and amounts not covered due to the provider being out-of-network. Due to uncertainties surrounding deductible levels and the number of out-of-network patients, the Company is not certain of the full amount of patient responsibility at the time of service. The Company estimates amounts due from patients prior to service and generally collects those amounts prior to service. Remaining amounts due from patients are then billed following completion of service.

The activity in the allowances for doubtful accounts for the years ending December 31, 2012 and 2011 follows:

	Balance at Beginning of Year		Additions Recognized as Reduction to Revenues		Write-offs, Net of Recoveries			Balance at End of Year
Year ended December 31, 2012	$	1,353,710	$	966,420	$	(660,793	)	$	1,659,337
Year ended December 31, 2011	$	98,642	$	1,704,811	$	(449,743	)	$	1,353,710

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. Certificates of deposit with original maturities of more than three months are also considered cash equivalents if there are no restrictions on withdrawing funds from the account.

Receivables from Affiliates – Receivables from Affiliates are stated at the amount billed to the Affiliates plus any accrued and unpaid interest.

Supplies inventories – Supplies inventories are stated at the lower of cost or market and primarily include operating supplies used in the direct or indirect treatment of patients. The Company accounts for inventories using the first in–first out method of accounting for substantially all of its inventories.

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. Assets under capital leases are amortized using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. 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-9

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

Asset Class	Useful Life
Furniture and equipment	3 to 7 years
Equipment under capital leases	3 to 7 years
Leasehold improvements	5 to 10 years or remaining lease period, whichever is shorter

Long-lived assets – The Company evaluates its long-lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Fair value estimates are derived from established market values of comparable assets or internal calculations of estimated future net cash flows. The Company’s estimates of future cash flows are based on assumptions and projections it believes to be reasonable and supportable. The Company’s assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix and changes in legislation and other payor payment patterns.

Goodwill and Intangible Assets – Goodwill is not amortized; instead, it is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill. Goodwill is allocated among and evaluated for impairment at the reporting unit level.

In September 2011, the Financial Accounting Standards Board issued new accounting guidance for testing goodwill for impairment. The guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.

The Company evaluates goodwill for impairment at least on an annual basis and more frequently if certain indicators are encountered. Goodwill is to be tested at the reporting unit level, defined as an ASC or hospital (referred to as a component), with the fair value of the reporting unit being compared to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired. The Company completed its annual impairment test as of December 31, 2012, and determined that goodwill was not impaired.

Intangible assets other than goodwill which include customer relationships, customer files, covenants not to compete, trademarks and payor contracts are amortized over their estimated useful lives using the straight line method. The remaining lives range from three to five years. 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 costs are expensed as incurred. Advertising expense for 2012 and 2011, included in continuing operations, was approximately $153,000 and $64,000, respectively.

Acquisition Costs – Acquisition costs are charged directly to expense when incurred.

F-10

Legal Issues – For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a quarterly basis or sooner if significant changes in matters have occurred to determine if a change in the likelihood of an unfavorable outcome or the estimate of a loss is necessary.

Income Taxes – The Company’s member has elected to have the Company’s income taxed as an “S” Corporation under provisions of the Internal Revenue Code and a similar section of the state income tax law. Therefore, taxable income or loss is reported to the individual member for inclusion in its respective tax returns and no provision for federal and state income taxes is included in these consolidated financial statements.

Concentration of credit risk – The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk. As of December 31, 2012 and 2011, the Company had cash deposits in excess of FDIC limits of $2.9 million and $0.8 million, respectively.

Recently Adopted and Recently Issued Accounting Guidance

Adopted Guidance

On January 1, 2012, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to conform existing guidance regarding fair value measurement and disclosure between GAAP and International Financial Reporting Standards. These changes both clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and amend certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The clarifying changes relate to the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and disclosure of quantitative information about unobservable inputs used for Level 3 fair value measurements. The amendments relate to measuring the fair value of financial instruments that are managed within a portfolio; application of premiums and discounts in a fair value measurement; and additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for those items categorized as Level 3, a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured at fair value for disclosure purposes only. Other than the additional disclosure requirements, the adoption of these changes had no impact on the Company’s consolidated financial statements.

In July 2011, the FASB issued “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities” (ASU 2011-07), which requires certain healthcare organizations that perform services for patients for which the ultimate collection of all or a portion of the amounts billed or billable cannot be determined at the time services are rendered to present all bad debt expense associated with patient service revenue as an offset to the patient service revenue line item in the statement of operations. The ASU also requires qualitative disclosures about the Company’s policy for recognizing revenue and bad debt expense for patient service transactions and quantitative information about the effects of changes in the assessment of collectability of patient service revenue. This ASU is effective for fiscal years beginning after December 15, 2011, and was retroactively adopted by the Company on January 1, 2012. Other than the additional disclosure requirements, the adoption of these changes had no impact on the Company’s consolidated financial statements.

F-11

In September 2011, the FASB issued changes to the testing of goodwill for impairment. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, go directly to the two-step quantitative impairment test. These changes became effective for the Company for any goodwill impairment test performed on January 1, 2012 or later. The adoption of these changes did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted changes issued by FASB to revenue recognition for multiple-deliverable arrangements. These changes require separation of consideration received in such arrangements by establishing a selling price hierarchy (not the same as fair value) for determining the selling price of a deliverable, which will be based on available information in the following order: vendor-specific objective evidence, third-party evidence, or estimated selling price; eliminate the residual method of allocation and require that the consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement to each deliverable on the basis of each deliverable’s selling price; require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis; and expand the disclosures related to multiple-deliverable revenue arrangements. The adoption of these changes had no impact on the Company’s consolidated financial statements, as the Company does not currently have any such arrangements with its customers.

On January 1, 2011, the Company adopted changes issued by the FASB to disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). The adoption of these changes had no impact on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted changes issued by the FASB to the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The adoption of these changes had no impact on the Company’s consolidated financial statements.

Issued Guidance

In July 2012, the FASB issued changes to the testing of indefinite-lived intangible assets for impairment, similar to the goodwill changes issued in September 2011. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. These changes become effective for the Company for any indefinite-lived intangible asset impairment test performed on January 1, 2013 or later, although early adoption is permitted. Upon adoption of these changes, management plans to proceed directly to the two-step quantitative test for the Company’s indefinite-lived intangible assets. As these changes should not affect the outcome of the impairment analysis of an indefinite-lived intangible asset, management has determined these changes will not have an impact on the Company’s consolidated financial statements.

F-12

In December 2011, the FASB issued changes to the disclosure of offsetting assets and liabilities. These changes require an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The enhanced disclosures will enable users of an entity’s financial statements to understand and evaluate the effect or potential effect of master netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. These changes become effective for the Company on January 1, 2013. Other than the additional disclosure requirements, management has determined that the adoption of these changes will not have an impact on the Company’s consolidated financial statements.

Note 3 – Acquisitions

On October 26, 2012, the Company acquired a controlling interest in East El Paso Physicians’ Medical Center, LLC (“El Paso”), located in El Paso, Texas. The Company obtained its controlling interest through the acquisition of 108.41 Class A ownership units and 37.00 non-dilutable Class C ownership units of the total 223.41 ownership units of El Paso, or 66.39%. The Company obtained the Class A units by guaranteeing debt in the amount of $50,000 per unit. Additional Class A units may be sold to other investors which may dilute the Company’s overall ownership percentage in El Paso. The Company obtained the Class C units by guaranteeing debt in the amount of $50,000 per unit. The Class C units may only be held by the Company and represent a 19.68% ownership in El Paso. This ownership percentage may not be diluted by the future sale of any other class of ownership unit. In the fourth quarter of 2012, the Company also completed the acquisition of two imaging centers located in El Paso, Texas (“Imaging Centers”). The Imaging Centers were acquired through a combination of cash payments and the assumption of certain debt and other obligations of the sellers.

The acquisition of El Paso was based on management’s belief that through the application of the Company’s management and operating model the hospital could be turned around to generate positive earnings and cash flow that will be accretive to the earnings and cash flow of the Company. The acquisition of the Imaging Centers is consistent with the Company’s strategy of growing revenue and earnings through acquiring ancillary service providers in close proximity to a managed or owned hospital.

The acquisitions were recorded by allocating the cost of the acquisition to the assets acquired, including intangible assets and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired, net of liabilities assumed, was recorded as goodwill, none of which is tax deductible. As of December 31, 2012, management completed a valuation of the fair value of the assets acquired and liabilities assumed in the El Paso acquisition and one of the imaging center acquisitions. Management expects to complete the valuation of the assets acquired in the other imaging center in the fourth quarter of 2013. The purchase allocation for the acquisitions was as follows:

	El Paso		Imaging Centers
Cash and cash equivalents	$	193,314	$	—
Accounts receivable		1,814,324		—
Inventories		932,184		7,500
Other current assets		613,860		—
Total current assets		3,553,682		7,500
Property and equipment		5,319,000		358,709
Intangible assets		8,293,000		—
Goodwill		603,250		551,278
Total assets acquired		17,768,932		917,487

F-13

	El Paso		Imaging Centers
Liabilities assumed:
Accounts payable and accrued liabilities		7,621,930		85,330
Other current liabilities		110,000		—
Short term debt		1,413,278		156,242
Current portion of long-term debt		1,982,848		78,423
Total current liabilities		11,128,056		319,995
Long-term debt, net of current portion		3,842,341		288,444
Other liabilities		2,798,535
Total liabilities assumed		17,768,932		608,439
Net assets acquired	$	—	$	309,048

El Paso agreed to pay the legal, due diligence and other expenses associated with the acquisition. As a result, during 2012, the Company did not record any material expenses related to the acquisition of El Paso. The company also did not incur any material expenses in the acquisition of the imaging centers.

The amount of acquisitions revenues and earnings included in the Company’s consolidated statements of operations for the year ended December 31, 2012, and the revenue and earnings of the combined entity had the acquisition dates for El Paso and the Imaging Centers been January 1, 2012 and 2011, are as follows:

	Revenues		Earnings
Actual:
From 10/26/2012 to 12/31/2012	$	5,151,604	$	(1,252,763	)
Supplemental Pro Forma:
2012	$	69,442,123	$	(7,388,605	)
2011	$	75,889,582	$	(3,153,579	)

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.

Note 4 – Equity Investments in Affiliates

The Company invests in non-majority interests in its Affiliates. The Company’s equity investments and respective ownership interest as of December 31, 2012 and 2011 are as follows:

		Ownership %
Affiliate	Location	2012			2011
ASCs
River Oaks Surgical Center, LLP	Houston, TX		—	%		10	%
Foundation Surgery Affiliate of Nacogdoches, LLP	Nacogdoches, TX		13	%		13	%
Foundation Surgery Affiliate of The Med Center, LLP	Houston, TX		—	%		20	%
Kirby Glen Surgery Center	Houston, TX		10	%		—	%
Foundation Surgery Affiliate of West Houston, LLP	Houston, TX		—	%		20	%
Park Ten Surgery Center	Houston, TX		10	%		—	%
Foundation Surgery Affiliate of Middleburg Heights, LLC	Middleburg Heights, OH		10	%		20	%
Foundation Surgery Affiliate of Huntingdon Valley, LP	Huntingdon Valley, PA		20	%		20	%
Foundation Surgery Affiliate of Seguin, LLP	Seguin, TX		20	%		20	%
New Jersey Surgery Center, LLC	Mercerville, NJ		10	%		10	%
Foundation Surgery Affiliate of Northwest Oklahoma City, LLC	Oklahoma City, OK		20	%		20	%
Foundation Surgery Affiliate of Grayson Count, LLP	Sherman, TX		20	%		20	%
Metropolitan Medical Partners, LLC	Chevy Chase, MD		18	%		23	%
Cumberland Valley Surgery Center, LLC	Hagerstown, MD		32	%		30	%
Frederick Surgical Center, LLC	Frederick, MD		20	%		19	%
Perkins Plaza Ambulatory Surgery Center, LLC	Baton Rouge, LA		—	%		24	%
Surgical Hospitals:
Grayson County Physicians Property, LLC	Sherman, TX		20	%		20	%
Houston Orthopedic Hospital, LLC	Houston, TX		20	%		20	%

F-14

The unaudited results of operations and financial position for the years ended and as of December 31, 2012 and 2011, respectively, of the Company’s equity investments in Affiliates are as follows:

(Unaudited)	2012		2011
Net operating revenues	$	203,083,755	$	184,156,537
Net income	$	43,345,570	$	28,954,015
Current assets	$	48,755,477	$	44,561,178
Noncurrent assets		48,369,312		54,937,050
Total assets	$	97,124,789	$	99,498,228
Current liabilities	$	29,161,233	$	27,691,787
Noncurrent liabilities		36,047,919		40,823,901
Total liabilities	$	65,209,152	$	68,515,688
Members’ equity	$	31,915,637	$	30,982,540

During 2012 and 2011, the Company sold certain equity investments in Affiliates. The gain or loss recorded on those transactions follows:

	Ownership % Sold			2012			2011
FSA of Middleburg Heights, LLC		10	%	$	342,055		$	—
Park Ten Surgery Center		10	%		35,299			—
Kirby Glen Surgery Center		10	%		16,537			—
Perkins Plaza ASC, LLC		24	%		(524,590	)		—
River Oaks Surgical Center, LLP		10	%		(42,800	)		—
FSA of El Paso, LLP		10	%		—			2,122,320
FSA of Dickinson, LLP		10	%		—			684,485
New Jersey Surgery Center, LLC		10	%		—			111,120
Gain (loss) on sale of equity investments in Affiliates				$	(173,499	)	$	2,917,925

In May 2012, the Company invested $200,000 for a 20% interest in River City Surgical Institute, LLC (“River City ASC”). This venture was a start-up ASC in Jacksonville, Florida along with one surgeon partner who owned the remaining 80% interest. The physician partner did not fulfill his obligations and as a result the River City ASC has not opened and management does not anticipate it opening. As a result, management determined that the Company’s investment in the River City ASC was impaired and recorded an impairment charge of $200,000 during the year ended December 31, 2012.

F-15

Note 5 – Property and Equipment

Following are the components of property and equipment included in the accompanying consolidated balance sheets as of December 31, 2012 and 2011:

	2012			2011
Equipment	$	11,755,055		$	7,937,624
Equipment under capital leases		12,186,938			9,221,810
Leasehold improvements		914,592			728,791
		24,856,585			17,888,225
Accumulated depreciation		(15,452,732	)		(13,640,333	)
	$	9,403,853		$	4,247,892

Depreciation expense for the years ended December 31, 2012 and 2011 was $1,812,399 and $1,789,929 respectively.

Note 6 – Goodwill and Other Intangibles

Changes in the carrying amount of goodwill during the years ended December 31, 2012 and 2011 were as follows:

	2012		2011
Balance, beginning of year	$	—	$	—
Business acquisitions		1,154,528		—
Balance, end of year	$	1,154,528	$	—

Changes in the carrying amount of intangible assets during the years ended December 31, 2012 and 2011 were as follows:

	Carrying Amount		Accumulated Amortization			Net
January 1, 2011	$	2,498,500	$	(337,528	)	$	2,160,972
Purchase of management agreement		1,000,000		—			1,000,000
Amortization		—		(401,544	)		(401,544	)
December 31, 2011		3,498,500		(739,072	)		2,759,428
Business acquisition		8,293,000		—			8,293,000
Amortization		—		(781,570	)		(781,570	)
December 31, 2012	$	11,791,500	$	(1,520,642	)	$	10,270,858

Intangible assets as of December 31, 2012 and 2011 include the following:

		2012							2011
	Useful Life (Years)	Carrying Amount		Accumulated Amortization			Net		Net
ASC management contracts	2 - 8	$	3,498,500	$	(1,295,642	)	$	2,202,858	$	2,745,539
Covenants not to compete	5		1,825,000		(60,833	)		1,764,167		—
Physician memberships	7		6,468,000		(164,167	)		6,303,833		—
Total		$	11,791,500	$	(1,520,642	)	$	10,270,858	$	2,745,539

F-16

Amortization expense for the next five years related to these intangible assets is expected to be as follows:

2013	$	1,718,228
2014		1,723,870
2015		1,723,870
2016		1,725,061
2017		1,663,037

Note 7 – Borrowings and Capital Lease Obligations

The Company’s short-term debt obligations as of December 31, 2012 and 2011 are as follows:

	Rate (1)	2012		2011
Senior Lender:
Note payable – working capital	6.5%	$	778,287	$	—
Other Lenders:
Note payable – working capital	5.0%		796,231		—
Note payable – HC REIT	0.25%		100,000		—
Notes payable – acquisition	6.0 – 8.0%		156,242		—
Insurance premium financings	3.1 – 4.1%		176,837		34,180
Short-term debt		$	2,007,597	$	34,180

(1) Effective rate as of December 31, 2012

The Company has a short-term working capital loan from its senior lender that is collateralized by the inventory, accounts receivable, equipment and other assets of one of the Company’s hospital subsidiaries. The note bears interest at 6.5% and the Company is required to make monthly payments of interest only with the balance due at maturity in October 2013. The Company is in process of refinancing this loan with its senior lender and expects the terms of the new note to be commensurate with the existing note.

The Company has a short-term working capital loan with a bank that is collateralized by the accounts receivable of one of the Company’s hospital subsidiaries. The note bears interest at a floating rate of prime plus 1% with a floor of 5% and the Company is required to make monthly payments of interest only with the balance due at maturity in September 2013. The Company is in process of refinancing this loan with its senior lender and expects the terms of the new note to be commensurate with the existing note.

The Company has an unsecured note payable with Health Care REIT, Inc. (“HC REIT”), the real estate investment trust that owns the building occupied by one of the Company’s hospital subsidiaries. The note (the “HC REIT Note 1”) bears interest at 0.25% and matured on October 1, 2012. In August 2013, the HC REIT Note 1 was forgiven by HC REIT in conjunction with the El Paso Real Estate Transaction described in Note 12 – Subsequent Events.

The Company has three notes payable related to the purchase of an imaging center in 2012. The notes are unsecured and are related to the payment of rent that was owed on the imaging center at the time it was purchased. The notes bear interest at fixed rates ranging from 6% to 8% and the Company is required to make monthly principal and interest payments totaling $26,603.

The Company has various insurance premium financing notes payable that bear interest rates ranging from 3.1% to 4.1%. The insurance notes mature from September 2013 to December 2013 and the Company is required to make monthly payments of principal and interest payments totaling $30,885.

F-17

The Company’s long-term debt and capital lease obligations as of December 31, 2012 and 2011 are as follows:

	Rate (1)	Maturity Date	2012			2011
Senior Lender:
Line of credit	7.0%	Jun. 2014	$	431,000		$	430,000
Notes payable – working capital	5.5 – 7.0%	Mar. 2014 – Feb. 2016		5,216,251			4,373,899
Note payable – equity investments	6.25%	Sept. 2016		4,289,057			5,228,942
Note payable – management agreements	6.75%	Dec. 2016		826,617			1,000,000
Other Lenders:
Notes payable – THE	4.6 – 8%	Dec. 2014 – Feb. 2016		453,034			451,614
Note payable – HC REIT	12.0%	Mar. 2014		450,917			—
Notes payable – physician partners	5.25 – 6.75%	Jun. 2013 – Nov. 2014		617,198			1,362,917
Note payable – equity investments	7.7%	Nov. 2013		167,841			339,606
Notes payable – acquisition	6.0%	Dec. 2014 – Oct. 2015		172,289			—
Capital lease obligations	0.2 – 12.3%	Apr. 2013 – Dec. 2022		4,879,886			1,998,373
Total				17,504,090			15,185,351
Less: Current portion of long-term debt				(5,971,339	)		(5,145,149	)
Long-term debt			$	11,532,751		$	10,040,202

(1) Effective rate as of December 31, 2012

The Company has a $1 million line of credit with its senior lender that is collateralized by the accounts receivable of one of the Company’s hospital subsidiaries. The line bears interest at a variable interest rate of prime plus 1% with a minimum rate of 7% and the Company is required to make monthly payments of interest. As of December 31, 2013 and 2012, the Company had $569,000 and $570,000, respectively, available to borrow under the line.

The Company has various working capital notes payable with its senior lender that are collateralized by the Company’s accounts receivable, inventory, equipment and other assets. The notes bear interest at variable rates ranging from prime plus 1% to 1.5% with minimum rates ranging from 5.5% to 7.0%. The Company is required to make monthly principal and interest payments under the notes payable totaling $156,912.

The Company has a note payable with its senior lender that is collateralized by the Company’s equity investment in one of its Affiliates. The note bears interest at a variable rate of prime plus 1.5% with a minimum rate of 6.25% and the Company is required to make monthly principal and interest payments of $107,821.

The Company has a note payable with its senior lender that is collateralized by the Company’s management agreement with one of its ASC Affiliates. The note bears interest at a variable rate of prime plus 2.5% with a minimum rate of 6.75% and the Company is required to make monthly principal and interest payments under the note of $19,683.

The Company has two notes payable with THE Investments, LLC (“THE”). The notes are unsecured and bear interest at a fixed rates ranging from 4.6% to 8%. The Company is required to make monthly principal and interest payments totaling $15,913. The managing member of THE is also the managing member of Tyche which holds a preferred member interest in the Company.

The Company has a note payable with HC REIT (the “HC REIT Note 2”). The note is collateralized by the accounts receivable of one of the Company’s hospital subsidiaries and the personal guaranties of the physicians that have noncontrolling interests in the Company’s hospital subsidiary. The note bears interest at a fixed rate of 12%. In August 2013, the HC REIT Note 2 was assigned to FSHA as part of the El Paso Real Estate Transaction described in Note 12 – Subsequent Events.

F-18

The Company has various working capital notes payable with banks that are collateralized by the personal guarantees of Company’s physician partners that own noncontrolling interests in one of the Company’s hospital subsidiaries. The notes bear interest at fixed rates ranging from 5.25% to 6.75%. The Company is required to make monthly principal and interest payments totaling $66,998.

The Company has a note payable with a bank that is collateralized by the Company’s equity investment in one of its Affiliates. The note bears interest at a fixed rate of 7.7% and the Company is required to make monthly principal and interest payments of $16,000.

The Company has two unsecured notes payable related to the purchase of an imaging center in 2012. One of the notes, with a balance of $138,289 at December 31, 2013, is owed to the seller of the imaging center; the other note payable, with a balance of $34,000 at December 31, 2013, is related to the payment of rent that was owed on the imaging center at the time it was purchased. The notes bear interest at a fixed rate of 6% and the Company is required to make monthly principal and interest payments totaling $7,219.

The Company has entered into various capital leases that are collateralized by certain computer and medical equipment used by the Company. The capital leases bear interest at fixed rates ranging from 0.2% to 12.3%. The Company is required to make monthly principal and interest payments under the capital leases totaling $152,804.

The Company has entered into various short-term and long-term notes payable with its senior lender, Legacy Bank (referred to as “Legacy Debt”). As of December 31, 2012 and 2011, the balance of the Legacy Debt was $11.5 million and $11.0 million, respectively. The Legacy Debt is collateralized by substantially all of the Company’s assets and a portion is personally guaranteed by certain officers of the Company. In conjunction with the Legacy Debt, the Company has agreed to comply with certain financial covenants (as defined) including: Debt Service Coverage Ratio of 1.25 to 1 or more, Consolidated Funded Debt to Tangible Net Worth of 2.5 to 1 or less, and Minimum Tangible Net Worth of $5.4 million. As of December 31, 2012, the financial covenants were calculated at FSA and FSHA on an individual company basis. Legacy Bank has waived the financial covenants until January 15, 2014. There is no assurance that Legacy Bank will waive any future violations of the financial covenants. See Note 12 – Subsequent Events for additional loan covenants agreed to in July 2013.

At December 31, 2012, future maturities of long-term debt were as follows:

2013	$	5,971,339
2014		5,111,895
2015		2,891,298
2016		1,459,298
2017		242,681
Thereafter		1,827,579

Note 8 – Preferred Member Interest

As of December 31, 2012 and 2011, the Company had an outstanding preferred membership interest of $11.1 million. The preferred member interest is owned by Tyche Health Enterprises, LLC (“Tyche”) and provides for annual cash dividends at a rate of 11.5% and is redeemable at the option of the preferred member beginning in 2013. In order to redeem the preferred membership interest, the preferred member must exercise a put option. The terms of the put option require the Company to repay 20% of preferred membership interests in four annual payments. If the put is exercised, any remaining preferred membership interests and accrued interest thereon must be paid in 2017. Since the put option cannot be separated from the preferred member interest and the redemption feature of the preferred membership interest is at the sole discretion of the preferred member, the outstanding preferred membership interest has been recorded at the mezzanine level in the accompanying consolidated balance sheets and the corresponding dividends are recorded as a reduction of accumulated deficit in the accompanying consolidated statements of member’s equity (deficit).

F-19

Note 9 – Commitments and Contingencies

Legal Issues

The Company is exposed to asserted and unasserted legal claims encountered in the normal course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the operating results or the financial position of the Company. During the year ended December 31, 2012 and 2011, the Company incurred $95,000 and $71,000, respectively, in settlement expenses related to its ongoing asserted and unasserted legal claims.

Operating Leases

The Company leases all of the real property used in its business for office space, surgical hospital facilities and certain medical equipment under operating lease agreements. Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term (“Deferred Rent”). As of December 31, 2012 and 2011, the Company had Deferred Rent of $4,307,500 and $1,703,906, respectively, and is included in “Other liabilities” in the accompanying consolidated balance sheets. 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 in 2012 and 2011 was $4,556,797 and $3,157,609, respectively.

Following is a summary of the future minimum lease payments under operating leases as of December 31, 2012:

2013	$	8,032,473
2014		7,750,865
2015		7,692,091
2016		7,424,647
2017		7,481,388
Thereafter		36,174,302
Less: Sublease Rentals		(496,414	)
	$	74,059,352

Note 10 – Fair Value Measurements

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market in an orderly transaction between market participants. In determining fair value, the accounting standards established a three-level hierarchy that distinguishes between (i) market data obtained or developed from independent sources (i.e., observable data inputs) and (ii) a reporting entity’s own data and assumptions that market participants would use in pricing an asset or liability (i.e., unobservable data inputs). Financial assets and financial liabilities measured and reported at fair value are classified in one of the following categories, in order of priority of observability and objectivity of pricing inputs:

• Level 1 – Fair value based on quoted prices in active markets for identical assets or liabilities.

• Level 2 – Fair value based on significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.

F-20

• Level 3 – Fair value based on prices or valuation techniques that require significant unobservable data inputs. Inputs would normally be a reporting entity’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.

The fair value measurement level for an asset or liability is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.

Recurring Fair Value Measurements: The carrying value of the Company’s financial assets and financial liabilities is their cost, which may differ from fair value. The carrying value of cash held as demand deposits, money market and certificates of deposit, accounts receivable, short-term borrowings, accounts payable and accrued liabilities approximated their fair value. At December 31, 2012 and 2011, the fair value of the Company’s long-term debt approximated its fair value. The fair value of the Company’s debt was valued using Level 3 inputs.

Nonrecurring Fair Value Measurements:

Business Acquisition – During 2012, the Company acquired El Paso and the Imaging Centers; see Note 3 – Acquisitions for additional information. The assets acquired and liabilities assumed in the El Paso and Imaging Centers transactions were recorded at their respective fair values on the date of the acquisition.

These nonrecurring fair value measurements were developed using significant unobservable inputs (Level 3). The primary valuation technique used was an income methodology based on management’s estimates of forecasted cash flows for each business unit, with those cash flows discounted to present value using rates commensurate with the risks of those cash flows. Assumptions used by management were similar to those that would be used by market participants performing valuations of these business units and were based on analysis of current and expected future economic conditions and the updated strategic plan for each business unit.

The Company did not have any assets measured at fair value on a nonrecurring basis as of December 31, 2012 or 2011.

Note 11 – Related Party Transactions

FHA charges the Company rent for office space and an allocation for shared services, including payroll, legal and support services. The total rental expense allocation charged to the Company was $310,810 and $103,155 during 2012 and 2011, respectively. The shared services allocation charged to the Company was $4,743,506 during 2011. There was no shared services allocation during 2012.

The Company has entered into agreements with certain of its Affiliate ASCs and hospitals to provide management services. As compensation for these services, the surgery centers and hospitals are charged management fees which are either fixed or are based on a percentage of the Affiliates cash collected or the Affiliates net revenue. The percentages range from 2.25% to 6.0%.

The Company has received cash advances from FHA and certain real estate subsidiaries and affiliates of FHA (“FHA Real Estate”) and New Age Fuel, Inc. (“New Age”). New Age has an ownership interest in Tyche. As of December 31, 2012 and 2011, the Company owes FHA Real Estate a total of $1,049,303 and $1,524,303, respectively, and New Age $316,833. The amounts owed to FHA Real Estate and New Age are included in “Other liabilities” on the accompanying consolidated balance sheets.

Note 12 – Subsequent Events

Management evaluated all activity of the Company and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements, except the following:

F-21

Graymark Transaction – On March 29, 2013, FHA entered into an Amended and Restated Membership Interest Purchase Agreement (“Amended Purchase Agreement”) with Graymark Healthcare, Inc. (“Graymark”) pursuant to which Graymark will acquire from FHA (the “Acquisition”) all of the outstanding membership interests of FSA and FSHA as well as assets of FHA related to the businesses of the Companies. On July 22, 2013, FHA and Graymark entered into the First Amendment to the Amended Purchase Agreement (the “First Amendment” and together with the Amended Purchase Agreement, as amended, the “Purchase Agreement”).

Pursuant to the Purchase Agreement, in consideration for the Acquisition (the “Consideration”), Graymark (i) issued to FHA 114,500,000 shares of its Common Stock, (ii) issued to FHA a demand promissory note in the principal amount of $2 million, and (iii) assumed certain liabilities and obligations of FHA.

Legacy Bank Consent – On July 22, 2013, as a condition to Legacy Bank providing its consent to the Acquisition as required under its existing FSA and FSHA loan agreements, Graymark, its subsidiary TSH Acquisition, LLC (the “Guarantor”), FHA, the Company and its subsidiaries (collectively the “FHA Group”) entered into a Consent, Ratification, Acknowledgement and Amendment to Loan Documents Agreement (the “Consent”) with Legacy Bank. As part of the Consent, Guarantor entered into a Loan Guaranty Agreement (‘Guaranty”) and Collateral Pledge Agreement (“Pledge’) with Legacy Bank.

In the Consent, the FHA Group ratified and acknowledged existing Legacy loans, the loan balances, the existing loan covenants and further agreed to additional loan covenants applicable to all of these Legacy loans. In the Guaranty, the Guarantor agreed to guarantee the payment of certain of these existing Legacy loans as detailed below. In the Pledge, Guarantor granted Legacy Bank a security interest in all of its membership interests in FSA, and FSHA, as collateral on the Guaranty.

The additional loan covenants that apply to the FHA Group Loans with Legacy Bank include the following:

Distributions – FSA and FSHA are permitted to make distributions as follows:.

a. Distributions solely between FSA and FSHA are permitted.

b. FSA and FSHA may make combined monthly distributions to TSH of the lesser of 80% of Graymark’s regular monthly overhead or $100,000.

c. FSA and FSHA may make quarterly distributions to TSH in the amount of TSH’s quarterly interest payment due on its preferred debt.

d. FSA and FSHA may make monthly distributions to TSH to pay FHA assumed debt up to $70,000 per month;

e. Such distributions may be made as long as immediately following a distribution the following conditions exist:

i. on a combined basis FSA and FSHA maintain the global Debt Service Coverage Ratios by the dates as follows: 1.0 to 1 by June 30, 2013; 1.05 to 1 by September 30, 2013; 1.1 to 1 by December 31, 2013; 1.15 to 1 by March 31, 2014; and 1.2 to 1 by June 30, 2014;

ii. the distribution shall not exceed FSA’s and FSHA’s combined net income for the previous month;

iii. there exists no default under the Consent or any of the loan documents; and,

iv. all distributions are included as post-net income on all quarterly financial statements.

Debt Service Coverage Ratio – the Company shall maintain a Debt Service Coverage Ratio of:1.0 to 1 by June 30, 2013; 1.05 to 1 by September 30, 2013; 1.1 to 1 by December 31, 2013; 1.15 to 1 by March 31, 2014; and 1.2 to 1 by June 30, 2014.

Minimum Tangible Net Worth – The Company must maintain a Minimum Tangible Net Worth (“MTNW”) for the quarter ending September 30, 2013, of at least the 2013 second quarter MNTW (defined as $11,127,023) plus 50% of the Company’s 2013 combined third quarter net income.

Financial Covenant Waiver – Legacy Bank has waived the financial covenants until January 15, 2014.

F-22

Tyche Transaction – On March 31, 2013, Graymark and TSH entered into an Asset Purchase Agreement (the “Tyche Agreement”) with Tyche which was subsequently amended on March 31, 2013 and July 22, 2013. The Tyche Agreement provides for the purchase of the preferred membership interests that Tyche owns in the Company under a Membership Interest Purchase Agreement, dated July 17, 2007, between Tyche and Foundation Surgery Holdings, L.L.C. (“FSH”), Foundation Weightwise Holdings, L.L.C. (nka FSHA), FHA as well as the right to various equity interest in the affiliates of FSH, FSA and FHA (collectively “Foundation”).

The transactions under the Tyche Agreement were closed on July 22, 2013. Under the Tyche Agreement, TSH purchased from Tyche (i) all of Tyche’s right, title and interest in the Membership Interest Purchase Agreement; (ii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSH and the right to various equity interests in the affiliates of FSH; (iii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSHA and the right to various equity interest in the affiliates of FSHA; and (iv) all of Tyche’s right, title and interest in any preferred or non-preferred ownership interest in any Foundation entities that have been acquired as a result of the Membership Interest Purchase Agreement.

Under the Tyche Agreement, TSH paid $11,102,372 to Tyche and Tyche related entities and TSH issued promissory notes totaling $2,339,905 to Tyche and Tyche related entities for total consideration of $13,442,277. As further consideration for the Tyche Agreement, Graymark issued Tyche and certain Tyche related entities warrants for the purchase of Graymark’s common stock. The warrants issued included:

1. Five year warrants for the purchase of a total of 1,937,500 shares of the Graymark’s common stock at a strike price of $1.00 per share;

2. Seven and one-half year warrants for the purchase of a total of 3,516,204 shares of the Graymark’s common stock at a strike price of $1.35 per share; and

3. Ten year warrants for the purchase of a total of 2,296,296 shares of the Graymark’s common stock at a strike price of $1.60 per share.

El Paso Real Estate Transaction – On August 30, 2013, Graymark and FSHA, entered into an Agreement of Sale and Purchase (“Purchase Sale Agreement” or “PSA”) with HCRI Texas Properties, Ltd. (“Seller”) and HC REIT pursuant to which FSHA agreed to acquire from Seller the real property occupied and certain personal property used by FSHA’s subsidiary East El Paso Physicians’ Medical Center, LLC (“EEPPMC”) under a master lease agreement (“Master Lease”) between EEPPMC, Seller and HCN.

The real property and other consideration covered by the Purchase Sale Agreement includes the hospital (“Hospital”) and medical office building (“MOB”) occupied by EEPPMC, an adjoining parcel of vacant land (“Excess Land”), the HC REIT Note 2, and certain personal property, including medical equipment, owned by Seller and attached to or located in and used in the operation of the Hospital and MOB (“Personal Property”). The purchase price under the Purchase Agreement was $39,066,428.

Simultaneous with the execution of the Purchase Sale Agreement, FSHA entered into an Agreement in Connection with Assignment and Assumption of PSA (“Assignment Agreement”) with DOC-FSH El Paso Medical Center, LLC (“DOC”) whereby FSHA assigned and DOC assumed, all of FSHA’s right, title, interest and obligations in, to and under the Purchase Sale Agreement, except for the Excess Land, Note and Personal Property. The consideration under the Assignment Agreement with DOC was $40,000,000 and was composed of the following:

1. $39,066,428 which was paid directly to Seller;

2. $400,000 which was retained by DOC as a security deposit for the performance of EEPPMC’s payment obligations under the Master Lease;

3. $463,678 which was paid to Graymark and FSHA; and

4. $69,894 which was paid on behalf of FSHA to cover certain legal and closing expenses.

FSHA has a one percent (1%) ownership interest in DOC. In conjunction with the Purchase Sale Agreement, HC REIT forgave the HC REIT Note 1, accrued and unpaid rent under an operating lease for the Hospital and the MOB of owed to HC REIT by EEPPMC of $4.3 million and a capital lease obligation owed by EEPPMC to HC REIT of $2.7 million.

F-23

EX-99.2

Exhibit 99.2

FOUNDATION SURGERY AFFILIATES, LLC

Condensed Consolidated Balance Sheet

As of June 30, 2013

(Unaudited)

ASSETS
Cash and cash equivalents	$	1,697,527
Accounts receivable, net of allowances for doubtful accounts of $2,090,081		9,551,964
Receivables from affiliates		828,039
Supplies inventories		1,983,224
Prepaid and other current assets		2,308,526
Total current assets		16,369,280
Property and equipment, net		10,852,172
Equity method investments in affiliates		7,056,224
Intangible assets, net		9,373,897
Goodwill		1,154,528
Other assets		126,559
Total assets	$	44,932,660
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Liabilities:
Accounts payable	$	12,452,009
Accrued liabilities		6,116,719
Preferred member dividends payable		3,372,234
Short-term debt		4,103,626
Current portion of long-term debt		6,828,981
Total current liabilities		32,873,569
Long-term debt, net of current portion		10,177,879
Other liabilities		5,796,910
Total liabilities		48,848,458
Preferred member interest		11,072,465
Commitments and contingencies (Note 4)
Member’s Deficit:
Foundation Surgery Affiliates member’s deficit:
Paid-in capital		2,705,791
Accumulated deficit		(14,826,094	)
Total Foundation Surgery Affiliates member’s deficit		(12,120,303	)
Noncontrolling interests		(2,867,960	)
Total member’s deficit		(14,988,263	)
Total liabilities, preferred member interest and member’s deficit	$	44,932,660

See Accompanying Notes to Condensed Consolidated Financial Statements

F-1

FOUNDATION SURGERY AFFILIATES, LLC

Condensed Consolidated Statements of Operations

For the Six Months Ended June 30, 2013 and 2012

(Unaudited)

	2013			2012
Revenues:
Patient services	$	34,486,737		$	15,214,799
Management fees from affiliates		3,525,849			4,194,663
Equity in earnings of affiliates		3,053,860			3,196,638
Other revenue		2,796,872			853,233
Provision for doubtful accounts		(1,727,413	)		(228,587	)
Revenues		42,135,905			23,230,746
Operating Expenses:
Salaries and benefits		12,795,379			6,774,001
Supplies		10,334,226			4,634,660
Other operating expenses		15,903,354			7,091,523
Depreciation and amortization		2,346,061			1,143,936
Total operating expenses		41,379,020			19,644,120
Operating income		756,885			3,586,626
Other Income (Expense):
Interest expense, net		(1,022,772	)		(554,757	)
Gain (loss) on sale of equity investments in affiliates		—			365,111
Other income (expense)		3,157			—
Net other (expense)		(1,019,615	)		(189,646	)
Net income (loss)		(262,730	)		3,396,980
Less: Net income (loss) attributable to noncontrolling interests		(817,990	)		67,899
Net income attributable to Foundation Surgery Affiliates	$	555,260		$	3,329,081

See Accompanying Notes to Condensed Consolidated Financial Statements

F-2

FOUNDATION SURGERY AFFILIATES, LLC

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2013 and 2012

(Unaudited)

	2013			2012
Operating activities:
Net income (loss)	$	(262,730	)	$	3,396,980
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,346,061			1,143,936
(Gain) on sale of equity investment in affiliates		—			(365,111	)
Provision for doubtful accounts		1,727,413			228,587
Equity in earnings of affiliates		(3,053,860	)		(3,196,638	)
Changes in assets and liabilities, net of acquisitions –
Accounts receivable, net of provision for doubtful accounts		(4,430,322	)		(16,602	)
Receivables from affiliates		217,446			68,983
Supplies inventories		(39,940	)		27,829
Prepaid and other current assets		107,610			(140,564	)
Other assets		—			10,373
Accounts payable		1,855,676			691,955
Accrued liabilities		531,539			(247,491	)
Other liabilities		23,272			31,513
Net cash provided by (used in) operating activities		(977,835	)		1,633,750
Investing activities:
Purchase of property and equipment		(2,897,419	)		(265,193	)
Sale of equity investments in affiliates		—			576,873
Purchase of equity investments in affiliates		—			(200,000	)
Distributions from affiliates		3,011,247			2,983,499
Net cash provided by investing activities		113,828			3,095,179
Financing activities:
Debt proceeds		4,247,473			777,192
Debt payments		(2,648,574	)		(2,425,363	)
Preferred member dividends		(814,102	)		(211,094	)
Distributions to noncontrolling interests		—			(31,502	)
Contributions from noncontrolling interests		—			12,500
Distributions from (to) member		(747,680	)		(1,302,774	)
Net cash provided by (used in) financing activities		37,117			(3,181,041	)
Net change in cash and cash equivalents		(826,890	)		1,547,888
Cash and cash equivalents at beginning of year		2,524,417			981,105
Cash and cash equivalents at end of year	$	1,697,527		$	2,528,993

See Accompanying Notes to Condensed Consolidated Financial Statements

F-3

FOUNDATION SURGERY AFFILIATES, LLC

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2013 and 2012

(Unaudited)

Note 1 – Nature of Business

Foundation Surgery Affiliates, LLC (the “Company”) is organized under the laws of the state of Nevada. The Company’s sole member is Foundation Healthcare Affiliates, LLC (“FHA”). The Company owns non-majority interests in ambulatory surgery centers (“ASCs” and “Affiliates”), organized as limited liability partnerships and limited liability companies, located in Texas, Oklahoma, Louisiana, Pennsylvania, New Jersey, Maryland and Ohio. The Company, through its consolidated variable interest entity, Foundation Surgical Hospital Affiliates, LLC (“FSHA”), owns controlling and noncontrolling interests in surgical hospitals located in Texas. The Company provides management services to a majority of its Affiliates under the terms of various management agreements.

Note 2 – Summary of Significant Accounting Policies

For a complete list of the Company’s significant accounting policies, please see the Company’s audited financial statements for the year ended December 31, 2012 included elsewhere in this Form 8-K.

Interim Financial Information – The condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial statements and in accordance 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 (“GAAP”) 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 six months ended June 30, 2013 are not necessarily indicative of results that may be expected for the year ended December 31, 2013. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012 included elsewhere in this Form 8-K.

Consolidation – The accompanying consolidated financial statements include the accounts of Foundation Surgery Affiliates, LLC and its wholly owned, majority owned and controlled subsidiaries. In addition, a variable interest entity (“VIE”), FSHA, has been consolidated as the Company is the primary beneficiary of FSHA. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company accounts for its investments in Affiliates in which the Company exhibits significant influence, but not control, in accordance with the equity method of accounting. The Company does not consolidate its equity method investments, but rather measures them at their initial costs and then subsequently adjusts their carrying values through income for their respective share of the earnings or losses during the period. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the companies and records reductions in carrying values when necessary.

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.

F-4

Note 3 – Borrowings and Capital Lease Obligations

Short-term debt – On March 19, 2013, the Company borrowed $2,010,027 from the Company’s senior lender, Legacy Bank. The note bears interest at prime plus 3.75% (7% at June 30, 2013) and has a floor of 7%. The note requires monthly payments of interest only with all unpaid principal and interest due at maturity on March 18, 2014. The note is collateralized by the inventory, accounts receivable, equipment and other assets of one of the Company’s hospital subsidiaries.

On February 1, 2013, the Company entered into an insurance premium financing notes payable that bear interest rates ranging from 3.1%. The insurance note matures in February 2014 and the Company is required to make monthly payments of principal and interest payments of $18,472.

Long-term debt – The Company has a $1 million line of credit with its senior lender that is collateralized by the accounts receivable of one of the Company’s hospital subsidiaries. The line bears interest at a fixed interest rate of 6% and the Company is required to make monthly payments of interest. During the six months ended June 30, 2013, the Company borrowed an additional $465,000 on the line of credit. As of June 30, 2013, the Company had $104,000 available to borrow under the line.

Capital lease obligations – During the six months ended June 30, 2013, the Company entered into various capital leases, for a total of $1,611,413, that are collateralized by certain computer and medical equipment used by the Company. The capital leases mature on dates ranging from February 2016 to February 2017 and bear interest at fixed rates ranging from 5.5% to 13.7%. The Company is required to make monthly principal and interest payments under the capital leases totaling $45,917.

Senior Lender – The Company has entered into various short-term and long-term notes payable with its senior lender, Legacy Bank (referred to as “Legacy Debt”). As of June 30, 2013, the balance of the Legacy Debt was $12.7 million. The Legacy Debt is collateralized by substantially all of the Company’s assets and a portion is personally guaranteed by certain officers of the Company. In conjunction with the Legacy Debt, the Company has agreed to comply with certain financial covenants (as defined) including: Debt Service Coverage Ratio of 1.25 to 1 or more, Consolidated Funded Debt to Tangible Net Worth of 2.5 to 1 or less, and Minimum Tangible Net Worth of $5.4 million. Legacy Bank has waived the financial covenants until January 15, 2014. There is no assurance that Legacy Bank will waive any future violations of the financial covenants. See Note 12 – Subsequent Events for additional loan covenants agreed to in July 2013.

Note 4 – Commitments and Contingencies

The Company is exposed to asserted and unasserted legal claims encountered in the normal course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the operating results or the financial position of the Company. There were no settlement expenses incurred during the six months ended June 30, 2013 and 2012.

Note 5 – Subsequent Events

Management evaluated all activity of the Company and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements, except the following:

Graymark Transaction – On March 29, 2013, FHA entered into an Amended and Restated Membership Interest Purchase Agreement (“Amended Purchase Agreement”) with Graymark Healthcare, Inc. (“Graymark”) pursuant to which Graymark will acquire from FHA (the “Acquisition”) all of the outstanding membership interests of FSA and FSHA as well as assets of FHA related to the businesses of the Companies. On July 22, 2013, FHA and Graymark entered into the First Amendment to the Amended Purchase Agreement (the “First Amendment” and together with the Amended Purchase Agreement, as amended, the “Purchase Agreement”).

F-5

Pursuant to the Purchase Agreement, in consideration for the Acquisition (the “Consideration”), Graymark (i) issued to FHA 114,500,000 shares of its Common Stock, (ii) issued to FHA a demand promissory note in the principal amount of $2 million, and (iii) assumed certain liabilities and obligations of FHA.

Legacy Bank Consent – On July 22, 2013, as a condition to Legacy Bank providing its consent to the Acquisition as required under its existing FSA and FSHA loan agreements, Graymark, its subsidiary TSH Acquisition, LLC (the “Guarantor”), FHA, the Company and its subsidiaries (collectively the “FHA Group”) entered into a Consent, Ratification, Acknowledgement and Amendment to Loan Documents Agreement (the “Consent”) with Legacy Bank. As part of the Consent, Guarantor entered into a Loan Guaranty Agreement (‘Guaranty”) and Collateral Pledge Agreement (“Pledge’) with Legacy Bank.

In the Consent, the FHA Group ratified and acknowledged existing Legacy loans, the loan balances, the existing loan covenants and further agreed to additional loan covenants applicable to all of these Legacy loans. In the Guaranty, the Guarantor agreed to guarantee the payment of certain of these existing Legacy loans as detailed below. In the Pledge, Guarantor granted Legacy Bank a security interest in all of its membership interests in FSA, and FSHA, as collateral on the Guaranty.

The additional loan covenants that apply to the FHA Group Loans with Legacy Bank include the following:

Distributions – FSA and FSHA are permitted to make distributions as follows:.

a. Distributions solely between FSA and FSHA are permitted.

b. FSA and FSHA may make combined monthly distributions to TSH of the lesser of 80% of Graymark’s regular monthly overhead or $100,000.

c. FSA and FSHA may make quarterly distributions to TSH in the amount of TSH’s quarterly interest payment due on its preferred debt.

d. FSA and FSHA may make monthly distributions to TSH to pay FHA assumed debt up to $70,000 per month;

e. Such distributions may be made as long as immediately following a distribution the following conditions exist:

i. on a combined basis FSA and FSHA maintain the global Debt Service Coverage Ratios by the dates as follows: 1.0 to 1 by June 30, 2013; 1.05 to 1 by September 30, 2013; 1.1 to 1 by December 31, 2013; 1.15 to 1 by March 31, 2014; and 1.2 to 1 by June 30, 2014;

ii. the distribution shall not exceed FSA’s and FSHA’s combined net income for the previous month;

iii. there exists no default under the Consent or any of the loan documents; and,

iv. all distributions are included as post-net income on all quarterly financial statements.

Debt Service Coverage Ratio – the Company shall maintain a Debt Service Coverage Ratio of:1.0 to 1 by June 30, 2013; 1.05 to 1 by September 30, 2013; 1.1 to 1 by December 31, 2013; 1.15 to 1 by March 31, 2014; and 1.2 to 1 by June 30, 2014.

Minimum Tangible Net Worth – The Company must maintain a Minimum Tangible Net Worth (“MTNW”) for the quarter ending September 30, 2013, of at least the 2013 second quarter MNTW (defined as $11,127,023) plus 50% of the Company’s 2013 combined third quarter net income.

Financial Covenant Waiver – Legacy Bank has waived the financial covenants until January 15, 2014.

Tyche Transaction – On March 31, 2013, Graymark and TSH entered into an Asset Purchase Agreement (the “Tyche Agreement”) with Tyche which was subsequently amended on March 31, 2013 and July 22, 2013. The Tyche Agreement provides for the purchase of the preferred membership interests that Tyche owns in the Company under a Membership Interest Purchase Agreement, dated July 17, 2007, between Tyche and Foundation Surgery Holdings, L.L.C. (“FSH”), Foundation Weightwise Holdings, L.L.C. (nka FSHA), FHA as well as the right to various equity interest in the affiliates of FSH, FSA and FHA (collectively “Foundation”).

F-6

The transactions under the Tyche Agreement were closed on July 22, 2013. Under the Tyche Agreement, TSH purchased from Tyche (i) all of Tyche’s right, title and interest in the Membership Interest Purchase Agreement; (ii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSH and the right to various equity interests in the affiliates of FSH; (iii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSHA and the right to various equity interest in the affiliates of FSHA; and (iv) all of Tyche’s right, title and interest in any preferred or non-preferred ownership interest in any Foundation entities that have been acquired as a result of the Membership Interest Purchase Agreement.

Under the Tyche Agreement, TSH paid $11,102,372 to Tyche and Tyche related entities and TSH issued promissory notes totaling $2,339,905 to Tyche and Tyche related entities for total consideration of $13,442,277. As further consideration for the Tyche Agreement, Graymark issued Tyche and certain Tyche related entities warrants for the purchase of Graymark’s common stock. The warrants issued included:

1. Five year warrants for the purchase of a total of 1,937,500 shares of the Graymark’s common stock at a strike price of $1.00 per share;

2. Seven and one-half year warrants for the purchase of a total of 3,516,204 shares of the Graymark’s common stock at a strike price of $1.35 per share; and

3. Ten year warrants for the purchase of a total of 2,296,296 shares of the Graymark’s common stock at a strike price of $1.60 per share.

El Paso Real Estate Transaction – On August 30, 2013, Graymark and FSHA, entered into an Agreement of Sale and Purchase (“Purchase Sale Agreement” or “PSA”) with HCRI Texas Properties, Ltd. (“Seller”) and HC REIT pursuant to which FSHA agreed to acquire from Seller the real property occupied and certain personal property used by FSHA’s subsidiary East El Paso Physicians’ Medical Center, LLC (“EEPPMC”) under a master lease agreement (“Master Lease”) between EEPPMC, Seller and HCN.

The real property and other consideration covered by the Purchase Sale Agreement includes the hospital (“Hospital”) and medical office building (“MOB”) occupied by EEPPMC, an adjoining parcel of vacant land (“Excess Land”), the HC REIT Note 2, and certain personal property, including medical equipment, owned by Seller and attached to or located in and used in the operation of the Hospital and MOB (“Personal Property”). The purchase price under the Purchase Agreement was $39,066,428.

Simultaneous with the execution of the Purchase Sale Agreement, FSHA entered into an Agreement in Connection with Assignment and Assumption of PSA (“Assignment Agreement”) with DOC-FSH El Paso Medical Center, LLC (“DOC”) whereby FSHA assigned and DOC assumed, all of FSHA’s right, title, interest and obligations in, to and under the Purchase Sale Agreement, except for the Excess Land, Note and Personal Property. The consideration under the Assignment Agreement with DOC was $40,000,000 and was composed of the following:

1. $39,066,428 which was paid directly to Seller;

2. $400,000 which was retained by DOC as a security deposit for the performance of EEPPMC’s payment obligations under the Master Lease;

3. $463,678 which was paid to Graymark and FSHA; and

4. $69,894 which was paid on behalf of FSHA to cover certain legal and closing expenses.

FSHA has a one percent (1%) ownership interest in DOC. In conjunction with the Purchase Sale Agreement, HC REIT forgave the HC REIT Note 1, accrued and unpaid rent under an operating lease for the Hospital and the MOB of owed to HC REIT by EEPPMC of $4.3 million and a capital lease obligation owed by EEPPMC to HC REIT of $2.7 million.

F-7

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On July 22, 2013, Graymark Healthcare, Inc. (the “Company”), completed the purchase of the outstanding membership interests of Foundation Surgery Affiliates, LLC (“FSA”) and Foundation Surgical Hospital Affiliates, LLC (“FSHA”) (collectively “Foundation”). Foundation was purchased from Foundation Healthcare Affiliates, LLC (“FHA”). Foundation is an owner and manager of ambulatory surgery centers (“ASC”(s)) and surgical hospitals with facilities located in Louisiana, Maryland, New Jersey, Ohio, Oklahoma, Pennsylvania and Texas. As purchase consideration for Foundation, the Company issued FHA 114,500,000 shares of the Company’s common stock, a demand promissory note for $2 million and assumed certain liabilities and obligations of FHA. The effective date of the Foundation acquisition was July 1, 2013. For financial reporting purposes, the transaction will be recorded as a reverse acquisition and Foundation will be considered the accounting acquirer. As a result of the reverse acquisition, the Company’s historical operating results for periods prior to the acquisition will only include the results of Foundation.

The unaudited pro forma condensed combined balance sheet as of June 30, 2013 was prepared as if the acquisitions had occurred on that date and combines the historical consolidated balance sheet of the Company with the unaudited consolidated balance sheets of FSA as of June 30, 2013. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2013 and the year ended December 31, 2012 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 FSA for the six months ended June 30, 2013 and the audited historical consolidated statements of FSA for the year ended December 31, 2012.

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 and Foundation 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 reverse acquisition purchase price allocation is not finalized, because the Company is still in the process of finalizing our estimates of fair value for the Company’s property, equipment and intangible assets. 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.

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of June 30, 2013

	Historical				Pro Forma			Pro Forma
	Graymark		Foundation		Adjustments			Combined
					(Notes 2 - 3)
ASSETS
Cash and cash equivalents	$	96,845	$	1,697,527	$	5,000,000 7,140,000 (11,102,372	i   e  )f	$	2,832,000
Accounts receivable, net		1,539,285		9,551,964		—			11,091,249
Receivables from affiliates		—		828,039		—			828,039
Supplies inventories		246,194		1,983,224		(173,000	)b		2,056,418
Current assets from discontinued operations		27,612		—		—			27,612
Prepaid and other current assets		380,015		2,308,526		—			2,688,541
Total current assets		2,289,951		16,369,280		864,628			19,523,859
Property and equipment, net		2,243,248		10,852,172		(1,326,000	)b		11,769,420
Equity method investment in affiliates		—		7,056,224		—			7,056,224
Intangible assets, net		—		9,373,897		4,000,000	b		13,373,897
Goodwill		—		1,154,528		20,847,608			22,002,136
Other assets		252,528		126,559		100,000	i		479,087
Total assets	$	4,785,727	$	44,932,660	$	24,486,236		$	74,204,623

See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)

As of June 30, 2013

	Historical						Pro Forma			Pro Forma
	Graymark			Foundation			Adjustments			Combined
							(Notes 2 – 4)
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Liabilities:
Accounts payable	$	3,645,164		$	12,452,009		$	(1,080,000	)b	$	15,017,173
Accrued liabilities		3,322,769			6,116,719			(116,587 (767,413	)h  )b		8,555,488
Preferred member dividend payable		—			3,372,234			(3,372,234	)f		—
Short-term debt		2,373,310			4,103,626			2,000,000 2,339,905 (2,373,310	a   f  )h		8,443,531
Current portion of long-term debt		16,312,347			6,828,981			691,379 (6,000,000 (5,648,290	a  )g  )h		12,184,417
Current liabilities from discontinued operations		356,322			—			—			356,322
Total current liabilities		26,009,912			32,873,569			(14,326,550	)		44,556,931
Long-term debt, net of current portion		60,040			10,177,979			5,100,000 725,394	i   a		16,063,413
Other liabilities		131,460			5,796,910			575,000	a		6,503,370
Total liabilities		26,201,412			48,848,458			(7,926,156	)		67,123,714
Preferred noncontrolling interest		—			11,072,465			(11,072,465 6,800,000	)f   e		6,800,000
Equity:
Graymark Healthcare shareholders’ equity (deficit):
Common stock		1,672			—			11,450 68 1,333 1,797	a   e   g   h		16,320
Paid-in capital		40,982,531			2,705,791			936,000 339,932 5,998,667 8,136,390 (41,207,090	f   e   g   h  )b		17,892,221
Accumulated deficit		(61,775,194	)		(14,826,094	)		66,422 61,775,194	f   b		(14,759,672	)
Total Graymark Healthcare shareholders’ equity (deficit)		(20,790,991	)		(12,120,303	)		36,060,163			3,148,869
Noncontrolling interests		(624,694	)		(2,867,960	)		624,694	b		(2,867,960	)
Total member’s equity (deficit)		(21,415,685	)		(14,988,263	)		36,684,857			280,909
Total liabilities, preferred noncontrolling interest & shareholders’ equity (deficit)	$	4,785,727		$	44,932,660		$	24,486,236		$	74,204,623

See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2013

	Historical						Pro Forma			Pro Forma
	Graymark			Foundation			Adjustments			Combined
							(Notes 2 - 3)
Revenues:
Patient services	$	2,671,830		$	34,486,737		$	(2,671,830	)d	$	34,486,737
Product sales		1,460,793			—			(1,460,793	)d		—
Management fees from affiliates		—			3,525,849			—			3,525,849
Income from investments in affiliates		—			3,053,860			—			3,053,860
Other revenue		1,217,139			2,796,872			—			4,014,011
Provision for doubtful accounts		(293,917	)		(1,727,413	)		293,917	d		(1,727,413	)
Revenues		5,055,845			42,135,905			(3,838,706	)		43,353,044
Operating Expenses:
Cost of sales		571,712			—			(571,712	)d		—
Salaries and benefits		4,022,986			12,795,379			(2,624,379	)d		14,193,986
Supplies		—			10,334,226			—			10,334,226
Other operating expenses		3,194,778			15,903,354			(2,110,112	)d		16,988,020
Write-down of deferred purchase consideration		300,000			—			—			300,000
Restructuring charges		399,617			—			(392,459	)d		7,158
Depreciation and amortization		505,850			2,346,061			(362,602	)d		2,489,309
Total operating expenses		8,994,943			41,379,020			(6,061,264	)		44,312,699
Operating income		(3,939,098	)		756,885			2,222,558			(959,655	)
Other Income (Expense):
Interest expense, net		(596,051	)		(1,022,772	)		319,131	d		(1,299,692	)
Other income (expense)		2,063			3,157			(2,063 66,422	)d   f		69,579
Net other (expense)		(593,988	)		(1,019,615	)		383,490			(1,230,113	)
Income (loss) from continuing operations, before taxes		(4,533,086	)		(262,730	)		2,606,048			(2,189,768	)
Provision for income taxes		—			—			—			—
Income (loss) from continuing operations, net of taxes		(4,533,086	)		(262,730	)		2,606,048			(2,189,768	)
Income (loss) from discontinued operations, net of taxes		189,421			—			(2,539,626	)d		(2,350,205	)
Net income (loss)		(4,343,665	)		(262,730	)		66,422			(4,539,973	)
Less: Net income (loss) attributable to noncontrolling interests		(131,559	)		(817,990	)		—			(949,549	)
Net income (loss) attributable to Graymark Healthcare	$	(4,212,106	)	$	555,260		$	66,422		$	(3,590,424	)
Net loss per share of common stock, basic and diluted	$	(0.25	)							$	(0.02	)
Weighted average number of common shares outstanding		16,742,328									163,203,276

See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2012

	Historical						Pro Forma			Pro Forma
	Graymark			Foundation			Adjustments			Combined
							(Notes 2 - 3)
Revenues:
Patient services	$	9,996,025		$	38,240,925		$	(9,996,025	)d	$	38,240,925
Product sales		4,451,747			—			(4,451,747	)d		—
Management fees from affiliates		—			7,945,061			—			7,945,061
Income from investments in affiliates		—			6,927,466			—			6,927,466
Other revenue		2,513,330			1,070,572			—			3,583,902
Provision for doubtful accounts		(1,444,525	)		(966,420	)		1,444,525	d		(966,420	)
Revenues		15,516,577			53,217,604			(13,003,247	)		55,730,934
Operating Expenses:
Cost of sales		1,598,758			—			(1,598,758	)d		—
Salaries and benefits		11,298,790			15,659,561			(8,185,197	)d		18,773,154
Supplies		—			11,114,752			—			11,114,752
Other operating expenses		8,081,307			18,709,965			(5,649,727	)d		21,141,545
Impairment of goodwill and intangibles		14,787,165			200,000			20,847,608 (12,725,770	c  )d		23,109,003
Depreciation and amortization		1,233,943			2,593,969			(871,968	)d		2,955,944
Total operating expenses		36,999,963			48,278,247			(8,183,812	)		77,094,398
Operating income		(21,483,386	)		4,939,357			(4,819,435	)		(21,363,464	)
Other Income (Expense):
Interest expense, net		(1,133,012	)		(1,263,797	)		674,287	d		(1,722,522	)
Loss on sale of equity investments in affiliates		—			(173,499	)		—			(173,499	)
Other income (expense)		48,245			273,699			(48,245	)d		273,699
Net other (expense)		(1,084,767	)		(1,163,597	)		626,042			(1,622,322	)
Income (loss) from continuing operations, before taxes		(22,568,153	)		3,775,760			(4,193,393	)		(22,985,786	)
Provision for income taxes		—			—			—			—
Income (loss) from continuing operations, net of taxes		(22,568,153	)		3,775,760			(4,193,393	)		(22,985,786	)
Income (loss) from discontinued operations, net of taxes		(224,470	)		—			(16,654,215	)d		(16,878,685	)
Net income (loss)		(22,792,623	)		3,775,760			(20,847,608	)		(39,864,471	)
Less: Net income (loss) attributable to noncontrolling interests		(342,920	)		46,867			—			(296,053	)
Net income (loss) attributable to Graymark Healthcare	$	(22,449,703	)	$	3,728,893		$	(20,847,608	)	$	(39,568,418	)
Net loss per share of common stock, basic and diluted	$	(1.46	)							$	(0.24	)
Weighted average number of common shares outstanding		15,329,359									163,203,276

See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

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NOTES TO UNAUDITED PRO FORMA CONDENSED

COMBINED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

The pro forma condensed combined financial statements present the pro forma effects of the acquisition by Graymark Healthcare, Inc. (the “Company” or “Graymark”) of the outstanding equity ownership interests in Foundation Surgery Affiliates, LLC (“FSA”) and Foundation Surgical Hospital Affiliates, LLC (“FSHA”) (collectively “Foundation”) for 114,500,000 shares of Graymark common stock, a $2 million demand promissory note and the assumption of certain liabilities and obligations of FHA (the “Acquisition”). For financial reporting purposes, the transaction will be recorded as a reverse acquisition and Foundation will be considered the accounting acquirer. As a result of the reverse acquisition, the Company’s historical operating results will only include the results of Foundation.

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 June 30, 2013, is presented assuming the actual date of the Acquisition.

The historical information presented for Graymark (i) as of June 30, 2013 and the six months then ended, is derived from the unaudited consolidated financial statements contained in the Company’s Quarterly Report on Form 10-Q, and (ii) the year ended December 31, 2012, is derived from the audited consolidated financial statements of Graymark contained in the Company’s Annual Report on Form 10-K.

The historical information presented for Foundation (i) as of and for the six months then ended, is derived from the unaudited financial statements of Foundation, and (ii) the year ended December 31, 2012, is derived from the audited consolidated statements of FSA.

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) The recording of the Acquisition consideration consisting of the issuance of 114,500,000 shares of Graymark common stock to FHA, the issuance of a $2 million demand promissory note to FHA and the assumption of $1,991,733 of debt and other liabilities from FHA.

(b) The recording of the excess fair value over the net assets acquired (goodwill) of Graymark of $20.8 million as a result of the reverse acquisition accounting which assumes that Foundation was the acquirer. The fair values of the assets acquired and liabilities assumed were preliminarily determined by management based on estimates of the identifiable intangible assets, estimates of the fair value of inventories and fixed assets, and estimates of the fair value of liabilities. Due to the timing of the acquisitions, it was not practical for the fair value appraisals of Graymark to be completed at the time of this report. Management expects that the final appraisals of Graymark will result in changes, which could be significant.

(c) Because of the historical operating losses of Graymark, management has determined that the goodwill of $20.8 million recorded as a result of the reverse acquisition cannot be supported by the ongoing operations of Graymark. As a result, the full amount of goodwill attributable to the reverse acquisition will be impaired and is shown as a pro forma adjustment in the accompanying pro forma condensed combined statement of operations for the year ended December 31, 2012.

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(d) During July 2013, Graymark closed four of its sleep diagnostic and therapy facilities and implemented a plan to close a fifth location.

On July 17, 2013, Graymark implemented a plan to sell certain sleep diagnostic and therapy facilities. The facilities identified as held for sale were selected because the revenue from these facilities have not met expectations and are not adequate to offset fixed operating costs. If a sale of these facilities cannot be achieved within an acceptable time frame, then these facilities will be closed.

As a result of identifying these sites as held for sale, the related assets, liabilities, results of operations and cash flows of the identified sites will be classified as discontinued operations in the Company’s consolidated financial statements. The accompanying pro forma condensed combined statements of operations for the six months ended June 30, 2013 and year ended December 31, 2013 include pro forma adjustments to reclass the historical operations of the closed and identified sites to discontinued operations.

(e) On March 13, 2013, the Company’s wholly-owned subsidiary, Foundation Health Enterprises, LLC (“FHE”) initiated a private placement offering for up to $15,960,000. The offering is comprised of 152 units of Class B member interests (“FHE Unit”). Each FHE Unit is being offered at $105,000 and entitles the purchaser to one (1) Class B membership interest in FHE, valued at $100,000, and 10,000 shares of the Company’s common stock, valued at $5,000. On July 22, 2013 and in conjunction with the Acquisition, FHE and the Company completed the sale of 68 FHE Units for total consideration received was $7,140,000.

The FHE Units provide for a cumulative preferred annual return of 9% on the amount allocated to the Class B membership interest. The FHE Units will be redeemed by FHE in four annual installments beginning in July 2014. The first three installments shall be in the amount of $10,000 per FHE Unit and the fourth installment will be in the amount of the unreturned capital contribution and any undistributed preferred distributions. The FHE Units are convertible at the election of the holder at any time prior to the complete redemption into restricted common shares of the Company at a conversion price of $2.00 per share.

The proceeds from the FHE Units were used to fund a portion of the Tyche Transaction described in (2)(f) below.

(f) On March 31, 2013, the Company and its wholly-owned subsidiary, TSH Acquisition, LLC (“TSH”) entered into an Asset Purchase Agreement (the “Tyche Agreement”) with Tyche Health Enterprises, LLC (“Tyche”) which was subsequently amended on March 31, 2013 and July 22, 2013. The Tyche Agreement provides for the purchase of the preferred membership interests that Tyche owns in certain subsidiaries of FSHA and FSA under a Membership Interest Purchase Agreement, dated July 17, 2007, between Tyche and Foundation Surgery Holdings, L.L.C. (“FSH”), Foundation Weightwise Holdings, L.L.C. (nka FSHA), Foundation Healthcare Affiliates, L.L.C. (“FHA”) as well as the right to various equity interest in the affiliates of FSH, FSA and FHA (collectively “Foundation”).

The transactions under the Tyche Agreement were closed on July 22, 2013. Under the Tyche Agreement, TSH purchased from Tyche (i) all of Tyche’s right, title and interest in the Membership Interest Purchase Agreement; (ii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSH and the right to various equity interests in the affiliates of FSH; (iii) all of Tyche’s right, title and interest in the preferred and common membership interest in FSHA and the right to various equity interest in the affiliates of FSHA; and (iv) all of Tyche’s right, title and interest in any preferred or non-preferred ownership interest in any Foundation entities that have been acquired as a result of the Membership Interest Purchase Agreement.

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Under the Tyche Agreement, TSH paid $11,102,372 to Tyche and Tyche related entities and TSH issued promissory notes totaling $2,339,905 to Tyche and Tyche related entities for total consideration of $13,442,277. The promissory notes bear interest at annual rate of 11.5% and mature on August 1, 2013 with all principal and interest being due at that time.

As further consideration for the Tyche Agreement, the Company issued Tyche and certain Tyche related entities warrants for the purchase of the Company’s common stock. The warrants issued included:

i. Five year warrants for the purchase of a total of 1,937,500 shares of the Company’s common stock at a strike price of $1.00 per share;

ii. Seven and one-half year warrants for the purchase of a total of 3,516,204 shares of the Company’s common stock at a strike price of $1.35 per share; and

iii. Ten year warrants for the purchase of a total of 2,296,296 shares of the Company’s common stock at a strike price of $1.60 per share.

(g) On July 22, 2013, the Company’s subsidiaries, SDC Holdings, LLC and ApothecaryRx, LLC (collectively the “Borrowers”), the Company and Stanton Nelson (the “Guarantor”) entered into a Second Amended and Restated Loan Agreement (the “New Loan Agreement”) and an Amended and Restated Promissory Note (the “New Note”) with Arvest Bank. The Company, Borrowers, Guarantor and other guarantors previously entered into the Amended and Restated Loan Agreement dated effective December 17, 2010, as amended by the First Amendment to Loan Agreement dated January 1, 2012, the Second Amendment to Loan Agreement dated effective June 30, 2012, and the Third Amendment to Loan Agreement dated effective October 12, 2012 (the “Prior Agreement”). Under the Prior Agreement, the Company and Borrowers are indebted to Arvest Bank under the Amended and Restated Promissory Note, in the original principal amount of $15,000,000 dated June 30, 2010 and the Second Amended and Restated Promissory Note, in the original principal amount of $30,000,000, dated June 30, 2010 (the “Prior Notes”). Arvest Bank, the Company, the Borrowers and the Guarantor have agreed to restructure the loan evidenced by the Prior Notes and the Prior Agreement. As of July 22, 2013, the outstanding principal amount of the New Note was $10,691,261.71.

On July 22, 2013 and in conjunction with the Acquisition, the Company entered into a Participation Agreement with Arvest Bank in which the Company purchased a $6,000,000 participation in the New Note with Arvest Bank in exchange for 13,333,333 shares of the our common stock.

(h) On July 22, 2013 and in conjunction with the Acquisition, the Company issued a promissory note in the original principal amount of $5,648,290 in favor of Roy T. Oliver (the “Note”). The principal amount of the Note represents the amount Mr. Oliver, a Guarantor under the Prior Agreement, paid to Arvest Bank in full satisfaction of his limited guaranty. Mr. Oliver is not a guarantor of the New Note.

The Note bears interest at an annual rate of 8.0% and is unsecured and subordinated to the New Loan Agreement. In the event the Company defaults on the Note, and the event of default is not cured in a timely manner, the lender has the right to declare the outstanding principal and accrued and unpaid interest immediately due and payable. Events of default under the Note include the failure of the Company to pay the Note when due, the Company’s assignment for the benefit of

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creditors or admission of its inability to pay debts as they become due, the commencement of bankruptcy or similar proceedings by or against the Company. or an event of default occurs under the Loan Agreement. The Note matures on July 31, 2013 provided that, if the New Loan Agreement as in effect on such maturity date does not permit the Company to repay the Note, then the maturity date is continued until such time as the Arvest loan is refinanced or the provisions of the Loan Agreement permits repayment.

On August 31, 2012, December 31, 2012, March 1, 2013, April 1, 2013 and July 22, 2013, the Company executed promissory notes with Mr. Roy T. Oliver in the amount of $1,184,808, $351,710, $485,082, $351,470 and $5,648,290, respectively, for a total of $8,021,360 (collectively referred to as the “Oliver Notes”). The Company used the proceeds from the notes to fund its payment obligations to Arvest Bank. On July 22, 2013 and in conjunction with the Acquisition, the Company issued Mr. Oliver 17,970,295 shares of common stock for full satisfaction of the Oliver Notes including principal and accrued interest owed thereon of $114,263.

(i) On July 22, 2013 and in conjunction with the Acquisition, the Company’s subsidiary, FHE executed a loan agreement and a promissory note in the amount of $5,100,000 payable to Valliance Bank. The note bears interest at annual rate of 10% and FHE is required to make quarterly payments of interest beginning on October 15, 2013. FHE is required to make one principal payment of $728,571 on August 15, 2014. The note matures on July 22, 2015 at which time all outstanding principal and accrued interest is due. The proceeds of the note, net of a $100,000 loan origination fee, were used to help fund FHE’s purchase of the preferred interests of FHA and FSHA from Tyche. The loan agreement requires FHE to prepay a portion of the loan upon the completion of a sale of FSHA’s equity interest in a hospital located in Sherman, TX. The promissory note is secured by the Company’s equity interests in TSH Acquisition, LLC. Valliance Bank is controlled by Mr. Roy T. Oliver, one of our greater than 5% shareholders and affiliates. Non-controlling interests in Valliance Bank are held by Mr. Stanton Nelson, the Company’s chief executive officer and Mr. Joseph Harroz, Jr., a director of the Company. Mr. Nelson and Mr. Harroz also serve as directors of Valliance Bank.

(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.

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