Reverse Acquisition

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Reverse Acquisition

Note 4 – Reverse Acquisition

On July 22, 2013, the Company acquired FSA and FSA’s consolidated variable interest entity, FSHA, from Foundation Healthcare Affiliates, LLC (“FHA”) pursuant to an Amended and Restated Membership Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Company (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 $2.0 million, and (iii) assumed certain liabilities and obligations of FHA totaling approximately $2.0 million.

For accounting purposes, the acquisition of FSA was accounted for as a reverse acquisition and as a result, the Company’s historical operating results included in the accompanying condensed consolidated financial statements for the periods prior to July 22, 2013 represent those of FSA. The historical financial statements of FSA have been adjusted for the effect of the recapitalization that occurred as a result of the reverse acquisition.

The acquisition of Foundation was based on management’s belief that Foundation’s acquisition and development strategy and operating model will enable the Company 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. The Company expects the acquisition of Foundation will generate positive earnings and cash flow that will be accretive to the earnings and cash flow of the Company.

Simultaneous with and subject to the reverse acquisition, the Company issued 6,000,000 shares of common stock to purchase a $6.0 million participation in the credit facility owed by the Company to Arvest Bank (see Note 5 – Discontinued Operations for more information) and 17,970,295 shares of common stock to Mr. Roy T. Oliver, one of our greater than 5% shareholders and affiliates, for full satisfaction of debt owed to Mr. Oliver totaling $8,136,390. Since the completion of the reverse acquisition was subject to these transactions, they have been recorded as part of the reverse acquisition.

Since FSA is deemed to be the accounting acquirer, the reverse acquisition was recorded by allocating the purchase price of the acquisition to the assets acquired, including intangible assets and liabilities assumed, from the legacy business of Graymark Healthcare, Inc. (“Graymark”), 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 estimated fair value of the assets acquired, net of liabilities assumed, was recorded as goodwill, none of which is anticipated to be tax deductible. The fair value amounts recorded are preliminary and are subject to change. Management has engaged a third-party valuation company to complete a valuation of the fair value of the assets acquired and liabilities assumed in the reverse acquisition. Management expects to complete the valuation in the fourth quarter of 2013.

The fair value of the total consideration issued in the reverse acquisition amounted to $17.4 million and included $13.4 million for the issuance of the Company’s common stock to FHA, Arvest Bank and Mr. Oliver, $2.0 million for the promissory note issued to FHA and $2.0 million for the debt obligations and liabilities assumed from FHA.

The preliminary purchase allocation for the reverse acquisition is presented in the table below. These preliminary estimates will be revised in future periods and the revisions may materially affect the presentation of the Company’s consolidated financial results. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill, subject to a review for impairment.

	Graymark (Preliminary)
Cash and cash equivalents	$	68,170
Accounts receivable		249,333
Current assets from discontinued operations		1,773,471
Other current assets		198,977
Total current assets		2,289,951
Property and equipment		647,862
Intangible assets		3,800,000
Goodwill		20,847,608
Other assets from discontinued operations		295,542
Other assets		12,753
Total assets acquired		27,893,716
Liabilities assumed:
Accounts payable and accrued liabilities		2,501,877
Short term debt		2,000,000
Current portion of long-term debt		714,711
Current liabilities from discontinued operations		7,812,192
Total current liabilities		13,028,780
Long-term debt, net of current portion		742,385
Other liabilities from discontinued operations		174,509
Other liabilities		575,000
Total liabilities assumed		14,520,674
Net assets acquired	$	13,373,042

During the nine months ended September 30, 2013 and 2012, the Company incurred $435,522 and $222,335 in expenses related to the reverse acquisition. The expenses incurred related primarily to legal fees related to the Purchase Agreement and structure of the transaction and professional fees related to the audits of the 2012 and 2011 consolidated financial statements of FSA.

The amounts of acquisition revenues and earnings included in the Company’s consolidated statements of operations for the nine months ended September 30, 2013, and the revenue and earnings of the combined entity had the reverse acquisition date for Graymark been January 1, 2012 are as follows:

	Revenue		Loss from Continuing Operations			Net Income (Loss)			Net Income (Loss) Attrib. to Graymark			Net Income (Loss) Attrib. to Graymark per Share
Actual:
From 7/22/2013 to 9/30/2013	$	454,759	$	(21,698,335	)	$	(22,026,176	)	$	(22,026,176	)
Supplemental Pro Forma:
Nine months ending 9/30/2013	$	72,637,964	$	(4,895,543	)	$	1,868,402		$	165,138		$	0.00
Nine months ending 9/30/2012	$	48,496,884	$	(25,106,231	)	$	(25,470,403	)	$	(25,784,049	)	$	(0.16	)

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.