10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

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

For the transition period from ______to ______

Commission File Number: 001-34171

FOUNDATION HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

OKLAHOMA	20-0180812
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

14000 N. Portland Avenue, Ste. 200

Oklahoma City, Oklahoma 73134

(Address of principal executive offices)

(405) 608-1700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

As of August 13, 2014, 171,323,381 shares of the registrant’s common stock, $0.0001 par value, were outstanding.

FOUNDATION HEALTHCARE, INC.

FORM 10-Q

For the Quarter Ended June 30, 2014

TABLE OF CONTENTS

Part I.	Financial Information	1
Item 1.	Consolidated Condensed Financial Statements (Unaudited)	1
	a) Balance Sheets	2
	b) Statements of Operations	3
	c) Statements of Cash Flows	5
	d) Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
Part II.	Other Information	31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
SIGNATURES		34

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

Throughout this report the first personal plural pronoun in the nominative case form “we” and its objective case form “us”, its possessive and the intensive case forms “our” and “ourselves” and its reflexive form “ourselves” refer collectively to Foundation Healthcare, Inc. and its subsidiaries including Foundation Surgery Affiliates, LLC (“FSA”) and Foundation Surgical Hospital Affiliates, LLC (“FSHA”).

i

PART I. FINANCIAL INFORMATION

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

The condensed consolidated financial statements included in this report have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013, the condensed consolidated statements of operations for the three months and six months ended June 30, 2014 and 2013, and the condensed consolidated statements of cash flows for six months ended June 30, 2014 and 2013, have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the related notes thereto included in our latest annual report on Form 10-K.

The consolidated statements for the unaudited interim periods presented include all adjustments, consisting of normal recurring adjustments, necessary to present a fair statement of the results for such interim periods. The results for any interim period may not be comparable to the same interim period in the previous year or necessarily indicative of earnings for the full year.

1

FOUNDATION HEALTHCARE, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

	June 30,			December 31,
	2014			2013
ASSETS
Cash and cash equivalents	$	1,875,669		$	4,212,076
Accounts receivable, net of allowances for doubtful    accounts of $2,262,790 and $4,778,915, respectively		13,045,004			12,755,642
Receivables from affiliates		938,538			848,002
Supplies inventories		1,906,963			1,931,142
Prepaid and other current assets		9,038,400			4,302,885
Current assets from discontinued operations		165,030			518,629
Total current assets		26,969,604			24,568,376
Property and equipment, net		10,780,857			12,073,986
Equity method investments in affiliates		5,804,919			5,699,093
Intangible assets, net		10,110,886			11,138,621
Goodwill		973,927			973,927
Other assets		446,274			244,598
Other assets from discontinued operations		450,529			576,228
Total assets	$	55,536,996		$	55,274,829
LIABILITIES, PREFERRED NONCONTROLLING INTEREST AND SHAREHOLDERS’ DEFICIT
Liabilities:
Accounts payable	$	10,288,809		$	11,648,987
Accrued liabilities		5,829,474			4,114,915
Preferred noncontrolling interests dividends payable		193,069			195,411
Short term debt		630,478			5,664,827
Current portion of long-term debt		3,146,727			7,919,179
Other current liabilities		3,553,701			4,391,587
Current liabilities from discontinued operations		1,249,217			5,620,697
Total current liabilities		24,891,475			39,555,603
Long-term debt, net of current portion		25,511,099			10,031,732
Other liabilities		15,215,544			12,255,809
Other liabilities from discontinued operations		—			9,969
Total liabilities		65,618,118			61,853,113
Preferred noncontrolling interest		8,700,000			8,700,000
Commitments and contingencies (Note 9)
Foundation Healthcare shareholders’ deficit:
Preferred stock $0.0001 par value, 10,000,000     authorized; no shares issued and outstanding		—			—
Common stock $0.0001 par value, 500,000,000 shares authorized;     171,323,381 and 163,834,886 issued and outstanding, respectively		17,132			16,383
Paid-in capital		18,939,344			18,241,756
Accumulated deficit		(38,573,934	)		(35,171,315	)
Total Foundation Healthcare shareholders’ deficit		(19,617,458	)		(16,913,176	)
Noncontrolling interests		836,336			1,634,892
Total deficit		(18,781,122	)		(15,278,284	)
Total liabilities, preferred noncontrolling interest and shareholders’ deficit	$	55,536,996		$	55,274,829

See Accompanying Notes to Condensed Consolidated Financial Statements

2

FOUNDATION HEALTHCARE, INC.

Condensed Consolidated Statements of Operations

For the Three Months Ended June 30, 2014 and 2013

(Unaudited)

	2014			2013
Net Revenues:
Patient services	$	19,909,721		$	18,626,077
Provision for doubtful accounts		(875,574	)		(1,090,563	)
Net patient services revenue		19,034,147			17,535,514
Management fees from affiliates		1,434,769			1,787,621
Other revenue		1,610,651			2,321,984
Revenues		22,079,567			21,645,119
Equity in earnings of affiliates		895,767			1,837,146
Operating Expenses:
Salaries and benefits		7,094,381			6,457,281
Supplies		5,693,006			5,833,285
Other operating expenses		8,925,671			8,147,336
Depreciation and amortization		1,423,384			1,229,374
Total operating expenses		23,136,442			21,667,276
Other Income (Expense):
Interest expense, net		(503,759	)		(556,103	)
Other income (expense)		840			(89,849	)
Net other (expense)		(502,919	)		(645,952	)
Income (loss) from continuing operations, before taxes		(664,027	)		1,169,037
Benefit for income taxes		—			—
Income (loss) from continuing operations, net of taxes		(664,027	)		1,169,037
Loss from discontinued operations, net of tax		(188,716	)		—
Net income (loss)		(852,743	)		1,169,037
Less:  Net income attributable to noncontrolling interests		461,301			211,944
Net income (loss) attributable to Foundation Healthcare		(1,314,044	)		957,093
Preferred noncontrolling interests dividends		(193,069	)		(318,331	)
Net income (loss) attributable to Foundation Healthcare common stock	$	(1,507,113	)	$	638,762
Earnings per common share (basic and diluted):
Net income (loss) attributable to continuing operations     attributable to Foundation Healthcare common stock	$	(0.01	)	$	0.00
Loss from discontinued operations, net of tax		0.00			0.00
Net income (loss) per share, attributable to     Foundation Healthcare common stock	$	(0.01	)	$	0.00
Weighted average number of common and diluted shares outstanding		171,285,897			162,523,276
Pro forma income information (Note 3):
Pro forma provision for income taxes				$	363,695
Pro forma net income attributable to     Foundation Healthcare common stock				$	593,398
Pro forma basic and diluted net income per share				$	0.00

See Accompanying Notes to Condensed Consolidated Financial Statements

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FOUNDATION HEALTHCARE, INC.

Condensed Consolidated Statements of Operations

For the Six Months Ended June 30, 2014 and 2013

(Unaudited)

	2014			2013
Net Revenues:
Patient services	$	39,423,203		$	34,486,737
Provision for doubtful accounts		(1,237,090	)		(1,727,414	)
Net patient services revenue		38,186,113			32,759,323
Management fees from affiliates		2,704,072			3,525,849
Other revenue		2,821,173			2,796,873
Revenues		43,711,358			39,082,045
Equity in earnings of affiliates		1,422,852			3,053,861
Operating Expenses:
Salaries and benefits		14,978,240			12,795,378
Supplies		10,634,377			10,334,225
Other operating expenses		18,154,125			15,903,357
Depreciation and amortization		2,884,301			2,346,061
Total operating expenses		46,651,043			41,379,021
Other Income (Expense):
Interest expense, net		(1,005,232	)		(1,022,772	)
Other income (expense)		840			3,158
Net other (expense)		(1,004,392	)		(1,019,614	)
Income (loss) from continuing operations, before taxes		(2,521,225	)		(262,729	)
Benefit for income taxes		852,005			—
Income (loss) from continuing operations, net of taxes		(1,669,220	)		(262,729	)
Loss from discontinued operations, net of tax		(501,038	)		-
Net income (loss)		(2,170,258	)		(262,729	)
Less:  Net income attributable to noncontrolling interests		846,223			(880,087	)
Net income (loss) attributable to Foundation Healthcare		(3,016,481	)		617,358
Preferred noncontrolling interests dividends		(386,138	)		(599,207	)
Net income (loss) attributable to Foundation Healthcare common stock	$	(3,402,619	)	$	18,151
Earnings per common share (basic and diluted):
Net income (loss) attributable to continuing operations     attributable to Foundation Healthcare common stock	$	(0.02	)	$	0.00
Loss from discontinued operations, net of tax		0.00			0.00
Net income (loss) per share, attributable to     Foundation Healthcare common stock	$	(0.02	)	$	0.00
Weighted average number of common and diluted shares outstanding		169,318,636			162,523,276
Pro forma income information (Note 3):
Pro forma provision for income taxes				$	234,596
Pro forma net income attributable to     Foundation Healthcare common stock				$	(216,445	)
Pro forma basic and diluted net income per share				$	0.00

See Accompanying Notes to Condensed Consolidated Financial Statements

4

FOUNDATION HEALTHCARE, INC.

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2014 and 2013

(Unaudited)

	2014			2013
Operating activities:
Net income (loss)	$	(2,170,258	)	$	(262,729	)
Less:  Loss from discontinued operations, net of tax		(501,038	)		—
Income from continuing operations		(1,669,220	)		(262,729	)
Adjustments to reconcile loss from continuing operations   to net cash provided by (used in) operating activities:
Depreciation and amortization		2,884,301			2,346,061
Stock-based compensation, net of cashless vesting		698,337			—
Provision for doubtful accounts		1,237,090			1,727,414
Equity in earnings of affiliates		(1,422,852	)		(3,053,861	)
Changes in assets and liabilities -
Accounts receivable, net of provision for doubtful accounts		(1,526,452	)		(4,430,322	)
Receivables from affiliates		(90,536	)		(763,329	)
Supplies Inventories		24,179			(39,940	)
Prepaid and other current assets		(4,735,515	)		(387,398	)
Other assets		(201,676	)		—
Accounts payable		(1,360,178	)		(67,654	)
Accrued liabilities		1,714,559			3,435,092
Other current liabilities		(837,886	)		—
Other liabilities		2,959,735			23,272
Net cash (used in) operating activities from continuing operations		(2,326,114	)		(1,473,394	)
Net cash (used in) operating activities from discontinued operations		(330,293	)		—
Net cash (used in) operating activities		(2,656,407	)		(1,473,394	)
Investing activities:
Purchase of property and equipment		(563,436	)		(2,897,420	)
Distributions from affiliates		1,317,026			3,011,245
Net cash provided by (used in) investing activities from continuing operations		753,590			113,825
Net cash provided by investing activities from discontinued operations		—			—
Net cash provided by (used in) investing activities		753,590			113,825
Financing activities:
Debt proceeds		28,468,812			4,575,738
Debt payments		(22,796,246	)		(2,976,299	)
Preferred noncontrolling interests dividend		(388,481	)		(776,644	)
Distributions to noncontrolling interests		(1,644,779	)		(37,446	)
Distributions to member		—			(747,680	)
Net cash provided by financing activities from continuing operations		3,639,306			37,669
Net cash (used in) financing activities from discontinued operations		(4,072,896	)		—
Net cash provided by (used in) financing activities		(433,590	)		37,669
Net change in cash and cash equivalents		(2,336,407	)		(1,321,900	)
Cash and cash equivalents at beginning of period		4,212,076			3,037,067
Cash and cash equivalents at end of period	$	1,875,669		$	1,715,167
Cash Paid for Interest and Income Taxes:
Interest expense	$	1,162,072		$	957,230
Interest expense, discontinued operations	$	168,733		$	—
Income taxes, continuing operations	$	1,950,000		$	—

See Accompanying Notes to Condensed Consolidated Financial Statements

5

FOUNDATION HEALTHCARE, INC.

Notes to Condensed Consolidated Financial Statements

For the Periods Ended June 30, 2014 and 2013

(Unaudited)

Note 1 – Nature of Business

Foundation Healthcare, Inc. (the “Company”) is organized under the laws of the state of Oklahoma and owns controlling and noncontrolling interests in surgical hospitals located in Texas. The Company also owns noncontrolling interests in ambulatory surgery centers (“ASCs”) located in Texas, Oklahoma, Pennsylvania, New Jersey, Maryland and Ohio. Additionally, the Company provides sleep testing management services to various rural hospitals in Iowa, Minnesota, Missouri, Nebraska and South Dakota under management contracts with the hospitals. The Company provides management services to a majority of the facilities that it has noncontrolling interests (referred to as “Affiliates”) under the terms of various management agreements.

Note 2 – Basis of Presentation

Reverse Acquisition – On July 22, 2013, the Company acquired Foundation Surgery Affiliates, LLC (“FSA”) and FSA’s consolidated variable interest entity, Foundation Surgical Hospital Affiliates, LLC (“FSHA”) (collectively referred to as “Foundation”). 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 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.

Going Concern and Management’s Plan – As of June 30, 2014, the Company had an accumulated deficit of $38.6 million, cash and cash equivalents of $1.9 and working capital of $2.1 million. During the six months ended June 30, 2014, the Company generated a net loss attributable to Foundation Healthcare of $3.0 million and used $2.3 million in cash flow from operating activities from continuing operations. On June 30, 2014, the Company completed a refinancing of substantially all of its outstanding indebtedness through the execution of the SNB Credit Facility. The SNB Credit Facility includes a Term Loan in the amount of $27.5 million and a Revolving Loan in the amount of $2.5 million (see Note 7 – Borrowings and Capital Lease Obligations).

As of June 30, 2014, the Company has $2.5 million available under the Revolving Loan. Management believes that the line of credit along with the Company’s cash on hand and projected cash flow from operations will provide the Company with enough liquidity to meet its cash requirements over the next 12 months. However, if the Company’s cash flows from operations do not meet or exceed management’s projections, the Company may need to raise additional funds through debt or equity financings. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 3 – Summary of Significant Accounting Policies

For a complete list of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the year ending December 31, 2013.

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 three months and six months ended June 30, 2014 are not necessarily indicative of results that may be expected for the year ended December 31, 2014. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2013. The December 31, 2013 consolidated balance sheet was derived from audited financial statements.

Pro forma income information – Prior to July 22, 2013, FSA’s and FSHA’s member had elected to have FSA’s and FSHA’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 tax returns and no provision for income taxes is included in the Company’s consolidated financial statements for periods prior to July 22, 2013. The pro forma income information provides an adjustment for income tax expense as if FSA and FSHA had been a C Corporation prior to July 22, 2013 at an assumed combined federal and state effective tax rate of 38%, which approximates the calculated statutory tax rates for the periods.

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

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 shares 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.

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, Medicaid and Tricare 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. The estimated net cost report settlements due to the Company were $521,555 and $235,000 as of June 30, 2014 and December 31, 2013 respectively, and are included in prepaid and other current assets in the accompanying consolidated balance sheets. We adjusted our cost report estimate by $286,555 during the six months ended June 30, 2014 based on our final filed cost report for 2013 and an estimate of the 2014 cost report.  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.

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

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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. During the Company’s normal quarterly review process at March 31, 2014, management determined that a portion of the accounts receivable related to personal injury cases at our FSH SA location had grown to a level requiring it to be analyzed as a distinct payor category. Based on the historical cash collection experience and other analytical measures as noted above, the allowance for doubtful accounts related to the personal injury cases was lowered by $1.0 million.

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 allowance for doubtful accounts for the six months ending June 30, 2014 follows:

	2014
Balance at beginning of period	$	4,778,915
Provisions recognized as reduction in revenues		1,237,090
Write-offs, net of recoveries		(3,753,215	)
Balance at end of period	$	2,262,790

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.

Restricted Cash – As of June 30, 2014 and December 31, 2013, the Company had restricted cash of approximately $3.4 million and $0.7 million respectively, included in prepaid and other current assets in the accompanying consolidated balance sheets.  The restricted cash at June 30, 2014 is related to the SNB Credit Facility (see Note 7 – Borrowings and Capital Lease Obligations) and represents the proceeds from the Term Loan that were not utilized as of June 30, 2014 to retire existing debt (“SNB Restricted Cash”).  The SNB Restricted Cash can be utilized to complete the payoff of the remaining indebtedness of the Company and to pay federal and state income taxes.  Use of the SNB Restricted Cash must be approved by Bank SNB.  The restricted cash at December 31, 2013 was pledged as collateral against debt that was paid-off from the proceeds of the SNB Credit Facility.

Goodwill and Intangible Assets – 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 will complete its annual impairment test in December 2014.

Intangible assets other than goodwill which include physician membership interests, service contracts and covenants not to compete are amortized over their estimated useful lives using the straight line method. The remaining lives range from five to ten 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.

Net income (loss) per share – Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an anti-dilutive effect on diluted loss per share are excluded from the calculation.

8

Recently Adopted and Recently Issued Accounting Guidance

Adopted Guidance

In February 2013, the FASB issued changes to the accounting for obligations resulting from joint and several liability arrangements. These changes require an entity to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of (i) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and (ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. An entity will also be required to disclose the nature and amount of the obligation as well as other information about those obligations. Examples of obligations subject to these requirements are debt arrangements and settled litigation and judicial rulings. These changes become effective for the Company on January 1, 2014. Management has determined that the adoption of these changes did not have an impact on the Company’s consolidated financial statements, as the Company does not currently have any such arrangements.

In July 2013, the FASB issued changes to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Previously, there was diversity in practice as no explicit guidance existed. These changes become effective for the Company on January 1, 2014. Management has determined that the adoption of these changes did not have a significant impact on the Company’s consolidated financial statements.

Issued Guidance

In April 2014, the FASB issued changes to the reporting of discontinued operations and disclosures of disposals of components of an entity. The amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The amendments are effective prospectively for all disposals (or classifications as held for sale) of components of an entity, and for all businesses that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. These changes become effective for the Company on January 1, 2017. Management is currently evaluating the potential impact of these changes on the Company’s consolidated financial statements.

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.

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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.

Simultaneous with and subject to the reverse acquisition, the Company issued 13,333,333 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 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 final purchase allocation for the reverse acquisition is presented in the table below:

	Graymark
Assets acquired
Cash and cash equivalents	$	68,170
Accounts receivable		249,333
Current assets from discontinued operations		1,360,143
Other current assets		198,976
Total current assets		1,876,622
Property and equipment		1,389,169
Intangible assets		2,733,000
Goodwill		21,864,781
Other assets		252,528
Other assets from discontinued operations		1,224,140
Total assets acquired	$	29,340,240
Liabilities assumed
Accounts payable and accrued liabilities	$	2,899,823
Short term debt		2,000,000
Current portion of long term debt		714,711
Current liabilities from discontinued operations		7,375,521
Total current liabilities		12,990,055
Long term debt		742,385
Other liabilities		305,969
Other liabilities from discontinued operations		1,362,957
Total liabilities assumed		15,401,366
Net assets acquired	$	13,938,874

During the six months ended June 30, 2013, the Company incurred $138,542 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.

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The amounts of acquisition revenues and earnings included in the Company’s consolidated statements of operations for the six months ended June 30, 2014, and the revenue and earnings of the combined entity had the reverse acquisition date for Graymark been January 1, 2013 are as follows:

									Attributable to Foundation
	Revenue		Loss From Continuing Operations			Net Loss			Net Loss			Net Loss Per Share
Actual:
From 1/1/2014 to 6/30/2014	$	1,036,089	$	(2,633,975	)	$	(2,909,171	)	$	(2,909,171	)	$	(0.02	)
Supplemental Pro Forma:
From 1/1/2013 to 6/30/2013	$	44,993,767	$	(5,959,633	)	$	(4,606,396	)	$	(3,594,748	)	$	(0.21	)

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 5 – Discontinued Operations

Prior to the reverse acquisition, Graymark committed to a plan to divest of or close certain sleep diagnostic and sleep therapy locations. The decision was based on a combination of the financial performance of the facilities and the shift in focus to the business model of Foundation. As a result of the pending closure or sale of these locations, the related assets, liabilities, results of operations and cash flows were classified as discontinued operations which were acquired by the Company in the reverse acquisition.

Under the plan, from July 2013 to October 2013, the Company closed or sold 24 sleep diagnostic locations including both IDTF and contracted locations in Georgia, Iowa, Kansas, Missouri, Nevada, Oklahoma and Texas and 5 sleep therapy locations in Iowa, Kansas, Nevada, Oklahoma and Texas.

As part of the reverse acquisition, the Company acquired the special charge liability of $475,570 related to the estimated closing costs resulting from the plan to sell or close the sleep diagnostic and therapy locations. For the six month period ended June 30, 2014, the activity in the acquired accruals for restructuring charges established for lease termination costs were as follows:

	Lease Termination Cost
Balance at December 31, 2013	$	78,235
Adjustments		139,940
Cash Payments		(20,575	)
Balance at June 30, 2014	$	197,600

Adjustments to the special charge liability include changes to estimated settlements or other changes to the liabilities. Additional charges or adjustments may be recorded in future periods dependent upon the Company’s ability to sub-lease or otherwise mitigate future lease costs at closed facilities.

The operating results of the discontinued sleep diagnostic and therapy locations and the Company’s other discontinued operations for the six month period ended June 30, 2014 are summarized below:

	2014
Revenue	$	123,728
Net loss before taxes		(692,462	)
Income tax benefit		191,424
Net loss from discontinued operations, net of tax	$	(501,038	)

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The balance sheet items for discontinued operations are summarized below:

	June 30, 2014		December 31, 2013
Cash and cash equivalents	$	—	$	49,252
Accounts receivable, net of allowances		—		222,943
Inventories		—		1,893
Other current assets		165,030		244,541
Total current assets		165,030		518,629
Fixed assets, net		300,529		426,228
Other assets		150,000		150,000
Total non-current assets		450,529		576,228
Total assets	$	615,559	$	1,094,857
Payables and accrued liabilities	$	1,249,217	$	1,557,771
Short-term debt		—		3,994,932
Current portion of long-term debt		—		67,994
Total current liabilities		1,249,217		5,620,697
Long-term debt, net of current portion		—		9,969
Total liabilities	$	1,249,217	$	5,630,666

The Company’s borrowings and capital lease obligations included in discontinued operations are as follows:

	June 30, 2014		December 31, 2013
Short-term Debt
Arvest bank	$	—	$	3,994,932
Long-term Debt
Sleep center notes payable		—		28,723
Equipment capital leases		—		49,389
Total		—		78,112
Less: Current portion of long term debt		—		(68,143	)
Long-term debt	$	—	$	9,969

On June 30, 2014, the Company completed a refinancing of substantially all its outstanding indebtedness through the execution of the SNB Credit Facility.  The SNB Credit Facility includes a Term Loan in the amount of $27.5 million and a Revolving Loan in the amount of $2.5 million (see Note 7 – Borrowings and Capital Lease Obligations).  A portion of the proceeds from the Term Loan were used to refinance the full amount of the Company’s indebtedness previously included in discontinued operations.

Note 6 – Goodwill and Other Intangibles

Changes in the carrying amount of goodwill are as follows:

	Gross Amount		Accumulated Impairment Loss			Net Carrying Value
December 31, 2013	$	23,019,309	$	(22,045,382	)	$	973,927
June 30, 2014	$	23,019,309	$	(22,045,382	)	$	973,927

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

The goodwill associated with the reverse acquisition was $21.9 million. The Company then determined the projected cash flows from the continuing operations of the legacy Graymark business were not sufficient to support the recorded goodwill. The Company evaluated the fair value of the goodwill subsequent to the reverse acquisition and determined the acquired goodwill was fully-impaired.

Changes in the carrying amount of intangible assets during the six months ended June 30, 2014 were as follows:

	Carrying		Accumulated
	Amount		Amortization			Net
December 31, 2013	$	14,524,500	$	(3,385,879	)	$	11,138,621
Amortization		—		(1,027,735	)		(1,027,735	)
June 30, 2014	$	14,524,500	$	(4,413,614	)	$	10,110,886

Intangible assets as of June 30, 2014 and December 31, 2013 include the following:

		June 30, 2014							December 31,
	Useful	Carrying		Accumulated					2013
	Life (Years)	Value		Amortization			Net		Net
Management fee contracts	6 - 8	$	3,498,500	$	(1,952,472	)	$	1,546,028	$	1,763,463
Non-compete	5		2,027,000		(646,444	)		1,380,556		1,583,256
Physician memberships	7		6,468,000		(1,540,000	)		4,928,000		5,390,000
Trade Name	5		381,000		(71,882	)		309,118		347,218
Service Contracts	10		2,150,000		(202,816	)		1,947,184		2,054,684
		$	14,524,500	$	(4,413,614	)	$	10,110,886	$	11,138,621

Amortization expense for the three months ended June 30, 2014 and 2013 was $513,868 and $446,218 respectively. Amortization expense for the six months ended June 30, 2014 and 2013 was $1,027,735 and $896,960 respectively. Amortization expense for the next five years related to these intangible assets is expected to be as follows:

Twelve months ended June 30,
2015	$	2,055,474
2016		2,055,474
2017		2,055,474
2018		1,618,673
2019		1,145,607
Thereafter		1,180,184

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Note 7 – Borrowings and Capital Lease Obligations

The Company’s short-term debt obligations are as follows:

	Rate (1)		June 30, 2014		December 31, 2013
Note payable - Legacy			$	—	$	2,814,027
Note payable - S&H leasing				—		1,865,600
Note payable - working capital				—		800,000
Insurance premium financings	3.9 - 4.8%			583,663		101,135
Note payable - Medicare cost report		10.1%		46,815		84,065
Short-term debt			$	630,478	$	5,664,827

(1) Effective rate as of June 30, 2014

The Company’s long-term debt and capital lease obligations are as follows:

	Rate (1)			Maturity Date	June 30, 2014			December 31, 2013
Senior Lender:
Note payable			4.4%	Jul. 2021	$	27,500,000		$	—
Other Lenders:
Line of credit						—			896,000
Notes payable - working capital						—			3,715,088
Note payable - equity investments						—			3,270,427
Note payable - management agreements						—			640,466
Note payable - assumption						—			146,857
Note payable - preferred interest redemption						—			5,100,000
Note payable - settlements		5.25 - 5.75%		Apr. 2016 - Jan. 2018		232,787			1,189,725
Note payable - THE		4.6 - 8.0%		Jan. 2015 - Feb. 2016		233,252			311,149
Notes payable - physician partners						—			103,604
Notes payable - acquisition			6.0%	Dec. 2014 - Oct. 2015		78,355			99,610
Capital Lease Obligations			5.5 - 9.1%			613,432			2,477,985
Total						28,657,826			17,950,911
Less: Current portion of long-term debt						(3,146,727	)		(7,919,179	)
Long-term debt					$	25,511,099		$	10,031,732

(1) Effective rate as of June 30, 2014

SNB Credit Facility

Effective June 30, 2014, we entered into a Loan Agreement with Bank SNB, National Association, and Texas Capital Bank, together referred to as Lenders and collectively the agreement is referred to as the SNB Credit Facility.  The SNB Credit Facility was used to consolidate substantially all of our and our subsidiaries’ debt in the principal amount of $27.5 million, which we refer to as the Term Loan, and provides for an additional revolving loan in the amount of $2.5 million, which we refer to as the Revolving Loan. As of June 30, 2014 we have not drawn funds from the Revolving Loan.  We have also entered into a number of ancillary agreements in connection with the SNB Credit Facility, including deposit account control agreements, subsidiary guarantees, security agreements and promissory notes.

Maturity Dates.  The Term Loan matures on June 30, 2021 and the Revolving Loan matures on June 30, 2016.

Interest Rates.  The interest rate for the Term Loan and Revolving Loan is 30-day LIBOR plus the Applicable Margins based on our Senior Debt Ratio, as defined.  The Applicable Margins are as follows:

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	Applicable Margin
Senior Debt Ratio	Revolving Loan	Term Loan
≥ 2.5x	3.75%	4.25%
< 2.5x, but ≥ 2.0x	3.25%	3.75%
< 2.0 x	2.75%	3.25%

The Applicable Margins are established at 3.75% for the Revolving Loan and 4.25% for the Term Loan through December 31, 2014.  Subsequent to December 31, 2014, the Applicable Margins will be adjusted on a quarterly basis based on our senior debt ratio.

The Senior Debt Ratio is calculated by dividing all of our indebtedness, including capital leases, which is secured by a lien or security interest in any of our assets by our EBITDA for the preceding four fiscal quarters.  EBITDA is defined in the SNB Credit Facility as our net income calculated before interest expense, provision for income taxes, depreciation and amortization expenses, stock compensation, gains arising from the write-up of assets, extraordinary gains and any one-time expenses approved by Bank SNB.

Interest and Principal Payments.  We are required to make quarterly payments of principal and interest on the Term Loan.  The first four quarterly payments on the Term Loan will be $875,000 plus all accrued and unpaid interest.  Each subsequent quarterly payment will be $1,000,000 plus all accrued and unpaid interest.  We are required to make quarterly payments on the Revolving Loan equal to the accrued and unpaid interest.  All unpaid principal and interest on the Term Loan and Revolving Loan must be paid on the respective maturity dates of June 30, 2021 and June 30, 2016.

Permitted Acquisitions.  We must obtain the Lenders approval for any acquisition, merger or consolidation in which the consideration paid for the acquisition, merger or consolidation is in excess of $1 million or for any acquisition, merger or consolidation in which the target entity’s operating income for the preceding 12 month period is less than zero.

Mandatory Prepayments.  If we sell any assets in excess of $100,000 or collectively sell any assets in a 12 month period in excess of $100,000, we must make a prepayment equal to the net proceeds of the asset sale(s).  If we receive proceeds from a debt or equity offering that is not used for a permitted acquisition over a 12 month period following the offering or for repayment of our preferred noncontrolling interests, we must make a prepayment equal to the net proceeds of the debt or equity offering.  Subsequent to the completion of our annual audited financial statements, we must make a prepayment equal to 30% of our Excess Cash Flow which is defined as the amount of EBITDA (as defined in the SNB Credit Facility) for the fiscal year that exceeds the sum of debt service payments plus capital expenditures plus cash payments for federal, state and local income taxes, plus distributions made by our Equity Owned Hospitals to persons other than us.

Voluntary Prepayments.  We may prepay amounts under the Term Loan at any time provided that we are required to pay a prepayment penalty of 2% of the amount prepaid if payment is made prior to the first anniversary, 1.5% if the prepayment is made after the first anniversary but prior to the second anniversary and 1% if the prepayment is made after the second anniversary but prior to the maturity date.  We may prepay amounts under the Revolving Loan at any time without penalty.

Guaranties.  Each of our direct or indirect wholly-owned subsidiaries jointly and severally and unconditionally guaranty payment of our obligations owed to Lenders.

Financial Covenants:

Senior Debt Ratio.  We must maintain a Senior Debt Ratio not in excess of 3.00 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014.

Senior Debt Service Coverage Ratio.  We must maintain a Senior Debt Service Coverage Ratio of not less than 1.30 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014. The Senior Debt Service Coverage ratio is the ratio of EBITDA (as defined in the SNB Credit Facility) for the preceding four fiscal quarters minus cash payments for federal, state and local taxes, minus capital expenditures to our debt service payments for the same period.

Adjusted Senior Debt Service Coverage Ratio.  We must maintain an Adjusted Senior Debt Service Coverage Ratio of not less than 1.05 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014. The Adjusted Senior Debt Service Coverage Ratio is the ratio of EBITDA (as defined in the SNB Credit Facility) for the preceding four fiscal quarters minus cash payments for federal, state and local taxes, minus capital expenditures, plus distributions made to our preferred noncontrolling interest holders, plus distributions made by our Equity Owned Hospitals to persons other than us to our debt service payments for the same period.

Minimum EBITDA.  We must have EBITDA of not less than $2 million for the fiscal quarter ended on June 30, 2014. The Company’s EBITDA adjusted for certain onetime expenses, which were approved by Bank SNB, was in excess of $2 million.

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Annualized EBITDA.  Until June 30, 2015 and for purposes of calculating compliance with the financial covenants in SNB Credit Facility, EBITDA shall be determined by annualizing EBITDA for the fiscal quarter ending on September 30, 2014 and each quarter that has elapsed thereafter.

Restrictions on Indebtedness.  We and our Equity Owned Hospitals are not allowed to create any indebtedness other than indebtedness for the purchase of fixed assets not exceeding $500,000 in any fiscal year, trade payables incurred in the ordinary course of business and not past due, contingent obligations and unsecured indebtedness not exceeding $100,000 in the aggregate at any time outstanding.

Use of Proceeds.  All proceeds of the Term Loan were used solely for the refinancing of existing indebtedness.  The proceeds of the Revolving Loan will be used for working capital.

Collateral.  Payment and performance of our obligations under the SNB Credit Facility are secured in general by all of our assets.

Defaults and Remedies.  In addition to the general defaults of failure to perform our obligations under the Loan Agreement, events of default also include the occurrence of a change in control, as defined, and the loss of our Medicare or Medicaid certification, collateral casualties, entry of a judgment of $150,000 or more, failure of first liens on collateral and the termination of any of our management agreements that represent more than 10% of our management fees for the preceding 18 month period.  In the event of a monetary default, all of our obligations due under the SNB Credit Facility shall become immediately due and payable.  In the event of a non-monetary default, we have 10 days or in some cases three days to cure before Bank SNB has the right to declare our obligations due under the SNB Credit Facility immediately due and payable.

At June 30, 2014, future maturities of long-term debt were as follows:

Twelve months ended June 30:
2015	$	3,146,727
2016		4,226,915
2017		4,209,171
2018		4,052,562
2019		4,022,451
Thereafter		9,000,000

Note 8 – Preferred Noncontrolling Interests

During 2013, the Company’s wholly-owned subsidiary, Foundation Health Enterprises, LLC (“FHE”) completed a private placement offering of $9,135,000. The offering was comprised of 87 units (“FHE Unit” or “preferred noncontrolling interest”). Each FHE Unit was offered at $105,000 and entitled 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. The total consideration of $9,135,000 was comprised of $8,700,000 attributable to the preferred noncontrolling interest and $435,000 attributable to the 870,000 shares of the Company’s common stock.

The FHE Units provide for a cumulative preferred annual return of 9% on the amount allocated to the Class B membership interests. 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. Since the FHE Units have a redemption feature and a conversion feature which the Company determined to be substantive, the preferred noncontrolling interests 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.

Note 9 – Commitments and Contingencies

Legal claims – 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 during the six months ended June 30, 2014 and 2013 related to the Company’s ongoing unasserted legal claims.

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Self-insurance – Effective January 1, 2014, the Company began using a combination of insurance and self-insurance for employee-related healthcare benefits. The self-insurance liability is determined actuarially, based on the actual claims filed and an estimate of incurred but not reported claims. Self-insurance reserves as of June 30, 2014 were $484,764 and are included in accrued liabilities in the accompanying consolidated balance sheets.

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.

· 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 June 30, 2014, the fair value of the Company’s long-term debt, including the current portion was determined to be approximately equal to its carrying value.

Nonrecurring Fair Value Measurements: During the six months ended June 30, 2014, the Company did not have any assets or liabilities recorded using nonrecurring fair value measurements.

Note 11 – Real Estate Transaction

On March 1, 2014, the Company executed a 15 year master lease on the building occupied by the Company’s hospital subsidiary in San Antonio, Texas for an annual rent of $2.3 million with annual escalations of 3%. The current lease income on the underlying sub-lease is approximately $2.1 million per year which includes the rent paid by FBH SA. The master lease is an operating lease. In conjunction with the master lease and certain other agreements with the landlord, the Company received $4.1 million at the time of the lease. Given the disparity between the annual rent expense under the master lease and the rental income of the underlying sub-lease, the cash received at the execution of the lease was deferred and will be recorded on a straight-line basis as a reduction in the rent expense under the master lease.

Note 12 – Related Party Transactions

Effective June 1, 2014, the Company’s hospital subsidiary located in El Paso, Texas entered into a sublease agreement with The New Sleep Lab International, Ltd., referred to as New Sleep. New Sleep is controlled by Dr. Robert Moreno, one of our Directors. The sublease with New Sleep calls for monthly rent payments of $8,767 and the sublease expires on November 30, 2018. The space subleased from New Sleep will be sublet to physician partners and casual uses of our hospital and is located in a building that also houses one of our imaging facilities. During the six months ended June 30, 2014, the Company incurred approximately $8,767 in lease expense under the terms of the lease.

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As of June 30, 2014, the Company had $0.9 million on deposit at Valliance Bank. Valliance Bank is controlled by Mr. Roy T. Oliver, one of our greater than 5% shareholders and affiliates. In addition, the Company was obligated to Valliance Bank under certain notes payable totaling $5.9 million at December 31, 2013. On June 30, 2014, the notes were paid in full from the proceeds of the SNB Credit facility.  The interest rates on the notes ranged from 5% to 10%. A non-controlling interest in Valliance Bank is held by Mr. Joseph Harroz, Jr., a director of the Company. Mr. Stanton Nelson, the Company’s Chief Executive Officer and Mr. Harroz also serve as directors of Valliance Bank.

In October 2013, the Company completed a private placement offering $9,135,000 (see Note 8 – Preferred Noncontrolling Interests for additional information). The offering was comprised of 87 FHE Units. Each FHE Unit was offered at $105,000 and entitled 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. Mr. Stanton Nelson, the Company’s chief executive officer, purchased 5 FHE units for $525,000.

The Company occupies office space subject to a lease agreement with City Place, LLC (“City Place”). Under the lease agreement, the Company pays monthly rent of $17,970 until June 30, 2014; $0.00 from July 1, 2014 to January 31, 2015 and $17,970 from February 1, 2015 to March 31, 2017 plus additional payments for allocable basic expenses of City Place; the lease expires on March 31, 2017. A non-controlling interest in City Place is held by Roy T. Oliver, one of the Company’s greater than 5% shareholders and affiliates. During the six months ended June 30, 2014, the Company incurred approximately $47,000 in lease expense under the terms of the lease.

As of June 30, 2014 and December 31, 2013, the Company has obligations of $1.4 million that are owed to FHA and certain real estate subsidiaries and affiliates of FHA related to transactions that occurred prior to the Foundation acquisition in July 2013. The amounts owed to FHA and FHA affiliates are included in other liabilities on the accompanying consolidated balance sheets.

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%.

Note 13 – Subsequent Events

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

During July 2014, the Company utilized approximately $0.5 million of the SNB Restricted Cash to complete the payoff of certain indebtedness that was outstanding at June 30, 2014.

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

Company Overview

Our primary focus is owning controlling interests in surgical hospitals. We currently have two Consolidated Hospitals and two Equity Owned Hospitals (hospitals in which we hold a non-controlling interest) in Texas. We also have ten ASCs located in Texas, Oklahoma, Pennsylvania, New Jersey, Maryland and Ohio. Additionally, we provide sleep testing management services to various rural hospitals in Iowa, Minnesota, Missouri, Nebraska and South Dakota under management contracts with the hospitals. We provide management services to a majority of our Affiliates under the terms of various management agreements.

We focus primarily on investing in and managing high quality cost effective surgical hospitals that meet the needs of patients, physicians and payors. We believe the facilities we invest in and manage provide an enhanced quality of care to our patients while providing administrative, clinical and economic benefits to physicians. Since physicians are critical to the direction of healthcare, we have developed our operating model to encourage physicians to affiliate with us and to use our facilities as an extension of their practices. We operate our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols with the goal of increasing physician productivity. We believe that our focus on physician satisfaction, combined with providing high quality healthcare in a friendly and convenient environment for patients, will continue to increase the number of procedures performed at our facilities each year.

Foundation Transaction

On July 22, 2013, we acquired 100% of the interests in Foundation Surgery Affiliates, LLC (“FSA”) and FSA’s consolidated variable interest entity, Foundation Surgical Hospital Affiliates, LLC (“FSHA”) (collectively “Foundation”) from Foundation Healthcare Affiliates, LLC (“FHA”) in exchange for 114,500,000 shares of our common stock and a promissory note in the amount of $2,000,000 (the “Foundation Acquisition”). We also assumed certain debt and other obligations of FHA in the amount of $1,991,733. The promissory note bore interest at a fixed rate of 7% and was paid in full on October 14, 2013.

For accounting purposes, the acquisition of FSA was accounted for as a reverse acquisition and as a result, the historical operating results included in our 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. Prior to July 22, 2013, FSA’s member had elected to have FSA’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 for periods prior to July 22, 2013. We have included pro forma income information in our consolidated statements of operations that provides an adjustment for income tax expense as if FSA and FSHA had been a C Corporation prior to July 22, 2013 at an assumed combined federal and state effective tax rate of 38%, which approximates the calculated statutory tax rates for the periods.

Going Concern and Management’s Plan

As of June 30, 2014, we had an accumulated deficit of $38.6 million, cash and cash equivalents of $1.9 and working capital of $2.1 million. During the six months ended June 30, 2014, we generated a net loss attributable to Foundation Healthcare of $3.0 million and used $2.3 million in cash flow from operating activities from continuing operations. On June 30, 2014, we completed a refinancing of substantially all of our outstanding indebtedness through the execution of the SNB Credit Facility. The SNB Credit Facility includes a Term Loan in the amount of $27.5 million and a Revolving Loan in the amount of $2.5 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources.”

We believe our cash on hand, the $2.5 million Revolving Loan and projected cash flow from operations will provide us enough liquidity to meet our cash requirements over the next 12 months. However, if our cash flows from operations do not meet or exceed our projections, we may need to raise additional funds through debt or equity financings. These uncertainties raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

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Hospital and ASC Business Overview

We are a nationally prominent owner and manager of surgical hospitals and ASCs with facilities located in Louisiana, Maryland, New Jersey, Ohio, Oklahoma, Pennsylvania and Texas. As of December 31, 2013, we owned interests four surgical hospitals and ten ASCs in partnership with over 400 local physicians. We own equity interests in all of our ASC and surgical hospital facilities except for one ASC that we only manage. Through our facilities, we are a major provider of surgical services; we performed approximately 72,500 outpatient and 2,200 inpatient surgical cases during 2013. 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 own over 51% in two of our larger hospitals located in San Antonio and El Paso, Texas (referred to as “Consolidated Hospitals”). Historically, our focus was to own a minority ownership in facilities and we currently have ownership, ranging from 10% to 32%, in two hospitals and ten ASCs (referred to as “Equity Owned Hospitals,” “Equity Owned ASCs,” or “Equity Owned Facilities”; also referred to as “Affiliates”). 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 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. Our average ASC has approximately 16,000 square feet of space with four operating rooms, as well as ancillary areas for preparation, recovery, reception and administration. Our ASCs are normally open weekdays from 7:00 a.m. to approximately 5:00 p.m. or until the last patient is discharged.

Our facilities are licensed at the state level, participate within the Medicare program and are accredited by the Accreditation Association for Ambulatory Healthcare (AAAHC) or the Det Norske Veritas (DNV) with the exception of our ASC in Nacogdoches, Texas. The Nacogdoches facility meets the accreditation standards, but the governing board of the ASC has elected to not be accredited. 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 our commitment to providing high quality care in our facilities.

Generally, our 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 surgical hospital and ASC 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 surgical hospital and ASC facilities derive a portion 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. Private payors typically follow the method in which the government reimburses healthcare providers. Under the government’s methodology our surgical hospital and ASC facilities are reimbursed for the performance of services through the payment of facility fees which vary according to whether the facility is a hospital or an ASC and the type of procedure that is performed. 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 than free-standing ASCs. 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.

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 facilities except for the Houston Orthopedic Surgical Hospital in Houston, Texas in which we own a 20% interest.

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Results of Operations

The following table sets forth selected results of our operations for the three months and six months ended June 30, 2014 and 2013. The following information was derived and taken from our unaudited financial statements appearing elsewhere in this report.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net Revenues:
Patient services	$	19,909,721		$	18,626,077		$	39,423,203		$	34,486,737
Provision for doubtful accounts		(875,574	)		(1,090,563	)		(1,237,090	)		(1,727,414	)
Net patient services revenue		19,034,147			17,535,514			38,186,113			32,759,323
Management fee from affiliates		1,434,769			1,787,621			2,704,072			3,525,849
Other revenue		1,610,651			2,321,984			2,821,173			2,796,873
Revenue		22,079,567			21,645,119			43,711,358			39,082,045
Equity in earnings from affiliates		895,767			1,837,146			1,422,852			3,053,861
Operating Expenses:
Salaries and benefits		7,094,381			6,457,281			14,978,240			12,795,378
Supplies		5,693,006			5,833,285			10,634,377			10,334,225
Other operating expenses		8,925,671			8,147,336			18,154,125			15,903,357
Depreciation and amortization		1,423,384			1,229,374			2,884,301			2,346,061
Net other expense		502,919			645,952			1,004,392			1,019,614
Income (loss) from continuing operations, before taxes		(664,027	)		1,169,037			(2,521,225	)		(262,729	)
Benefit for income taxes		—			—			852,005			—
Income (loss) from continuing operations, net of taxes		(664,027	)		1,169,037			(1,669,220	)		(262,729	)
Discontinued operations, net of tax		(188,716	)		—			(501,038	)		—
Net income (loss)		(852,743	)		1,169,037			(2,170,258	)		(262,729	)
Less: Noncontrolling interests		461,301			211,944			846,223			(880,087	)
Net income (loss) attributable to Foundation Healthcare	$	(1,314,044	)	$	957,093		$	(3,016,481	)	$	617,358

Discussion of Three Month Periods Ended June 30, 2014 and 2013

Overall comments – as a result of the Foundation transaction on July 22, 2013 being recorded as a reverse acquisition, the operating results of the Company’s legacy business (referred to as “legacy Graymark”) is not included in the operating results for the three months ended June 30, 2013.

Patient services revenue increased $1.3 million or 7.0% during the three months ended June 30, 2014 compared with the second quarter of 2013. The increase was primarily due to:

— An increase in average reimbursement per surgical case at East El Paso Physician Medical Center, LLC (“EEPMC”) driven by an increase in inpatient spine cases resulted in an increase in patient service revenue of $0.5 million and;

— An increase in surgical case volume at Foundation Surgical Hospital of San Antonio (“FSH SA”) driven by an increase in surgical case volume, primarily in spine and orthopedic cases, resulted in an increase in patient services revenue of $0.8 million.

Provision for doubtful accounts decreased $0.2 million or 18.2% during the three months ended June 30, 2014 compared with the second quarter of 2013. Provision for doubtful accounts as a percent of patient services revenue was 4.4% and 5.9% for the second quarter of 2014 and 2013, respectively. Based on our quarterly analysis of historic bad debt trends, we reduced our allowance rates in several aging categories, in line with the historical trends, at both our EEPMC and FSH SA facilities which resulted in the $0.2 million decrease compared to the second quarter of 2013.

Management fees from affiliates decreased $0.4 million or 22.2% during the three months ended June 30, 2014 compared with the second quarter of 2013. Our management fees at both our ASCs and surgical hospitals are based on a percentage of collections. Lower collections at our ASCs due to reduced volumes resulted in a decrease of $0.3 million. An agreement effective in June 2013 to lower our management fees at one of our managed hospitals resulted in a decrease of $0.1 million.

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Other revenue decreased $0.7 million or 30.4% during the three months ended June 30, 2014 compared with the second quarter of 2013. The decrease was due to $1.9 million in health care information system implementation (Meaningful Use) payments received at our EEPMC facility in the second quarter of 2013.  We did not receive any Meaningful Use payments in the second quarter of 2014.  The decrease was partially offset by revenue from the sleep center management fees earned at our legacy Graymark hospital outreach locations of $0.5 million.  There is no revenue included from the hospital outreach locations during the second quarter of 2013 as a result of the reverse acquisition recorded on July 22, 2013.  The decline was also offset by $0.7 million related to the change in accounting for one of our ASC locations from the equity method to the cost method due to our determination on December 31, 2013 that we no longer had significant influence over this ASC.

Income from equity investments in affiliates decreased $0.9 million or 50.0% during the three months ended June 30, 2014 compared with the second quarter of 2013. A change in accounting method for one of our ASC’s from the equity method to the cost method resulted in the distributions from that location being booked as other revenue in 2014 resulting in a decrease of $0.7 million. Additionally, lower volumes and average reimbursement levels at one of our ASC’s in Pennsylvania resulted in a decrease of $0.2 million.

Salaries and benefits increased $0.6 million or 9.2% to $7.1 million from $6.5 million during the three months ended June 30, 2014, compared with the second quarter of 2013. The increase in salaries and benefits was primarily due to:

— $0.2 million of stock compensation expense;

— $0.3 million of salaries and benefits at legacy Graymark; and

— $0.1 million due to increased salaries and benefits resulting from a combination of normal annual salary increases and increased personnel required to manage our expanding hospital operations.

Supplies expense decreased $0.1 million or 1.7% to $5.7 million from $5.8 million during the three months ended June 30, 2014, compared with the second quarter of 2013. The decrease is due to a $0.7 million decrease in supply expense at our EEPMC facility primarily due to an overall decline in case volume compared to the second quarter of 2013, offset by a $0.6 million increase in supply expense at our FSH SA facility due to an increase in case volume compared to the second quarter of 2013.

Other operating expenses increased $0.8 million or 9.9% to $8.9 million from $8.1 million during the three months ended June 30, 2014, compared with the second quarter of 2013. The increase in other operating expenses was primarily due to:

— $0.1 million in increased facility lease expense and higher professional service fees and;

— $0.7 million of other operating expenses at legacy Graymark.

Depreciation and amortization represents the depreciation expense associated with our fixed assets and the amortization attributable to our intangible assets. Depreciation and amortization increased $0.2 million in the second quarter of 2014 compared to the second quarter of 2013. The increase was due to depreciation and amortization at legacy Graymark.

Net other expense represents primarily interest expense on borrowings reduced by interest income earned on cash and cash equivalents and the gain or loss on the sale of equity investments in affiliates. Net other expense decreased $0.1 million in the second quarter of 2014 compared to the second quarter of 2013. The decrease is related to reductions in debt balances in the normal course of business compared to the second quarter of 2013.

Discontinued operations represent the net loss from the operations of our independent diagnostic testing facilities (“IDTF”) which were classified as held for sale prior the Graymark reverse acquisition. The results from our discontinued operations for the three months ended June 30, 2014 are summarized below:

	2014
Revenue	$	—
Net loss before taxes		(188,716	)
Income tax benefit		—
Net loss from discontinued operations, net of tax	$	(188,716	)

Noncontrolling interests were allocated $0.5 million and $0.2 million of net income during the three months ended June 30, 2014 and 2013, respectively. Noncontrolling interests are the equity ownership interests in our majority owned hospital subsidiaries, EEPMC and FSH SA.

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Net income (loss) attributable to Foundation Healthcare. Our operations resulted in a net loss of $1.3 million during the second quarter of 2014, compared to net income of $1.0 million during the second quarter of 2013.

Discussion of Six Month Periods Ended June 30, 2014 and 2013

Overall comments – as a result of the Foundation transaction on July 22, 2013 being recorded as a reverse acquisition, the operating results of legacy Graymark is not included in the operating results for the six months ended June 30, 2013.

Patient services revenue increased $4.9 million or 14.2% during the six months ended June 30, 2014 compared with the first six months of 2013. The increase was primarily due to:

— An increase in average reimbursement per case at EEPMC driven primarily by an increase in inpatient surgical spine cases resulted in an increase in patient service revenue of $2.0 million and;

— An increase in surgical case volume and the average reimbursement per surgical case at FSH SA which was driven by an increase in spine and orthopedic cases resulted in an increase in patient services revenue of $2.9 million.

Provision for doubtful accounts decreased $0.5 million or 29.4% during the six months ended June 30, 2014 compared with the first six months of 2013. Provision for doubtful accounts as a percent of patient services revenue was 3.1% and 5.0% for the six months ended June 30, 2014 and 2013, respectively. Based on our quarterly analysis of historic bad debt trends, we reduced our allowance rates in several aging categories, in line with the historical trends, at both our EPPMC and FSH SA facilities in both the first and second quarters of 2014 which resulted in the $0.5 million decrease compared to the second quarter of 2013.

Management fees from affiliates decreased $0.8 million or 22.9% during the six months ended June 30, 2014 compared with the first six months of 2013. Our management fees at both our ASCs and surgical hospitals are based on a percentage of collections. Lower collections at our ASCs due to reduced volumes and unplanned closures due to inclement weather in the first quarter of 2014 resulted in a decrease of $0.4 million. An agreement to lower our management fees beginning in June 2013 at one of our managed hospitals resulted in a decrease of $0.4 million.

Other revenue was unchanged during the six months ended June 30, 2014 compared with the first six months of 2013. Increases in other revenue in the first six months of 2014 compared to 2013 include $1.0 million in revenue earned during the first six months of 2014 from the sleep center management fees earned at our legacy Graymark hospital outreach locations, there is no revenue included from the hospital outreach locations during the first half of 2013 as a result of the reverse acquisition recorded on July 22, 2013, and $1.2 million related to the change in accounting for one of our ASC locations from the equity method to the cost method due to our determination on December 31, 2013 that we no longer had significant influence over this ASC. The offsetting decrease in other revenue is due to receipt of $1.9 million of Meaningful Use payments at our EEPMC facility in the second quarter of 2013, no meaningful use payments were received in 2014, and a $0.3 million distribution from our minority owned hospital in Houston, Texas received in the first quarter of 2013. We did not receive a distribution from that facility in the first quarter of 2014.

Income from equity investments in affiliates decreased $1.7 million or 54.8% during the six months ended June 30, 2014 compared with the first six months of 2013. A change in accounting method for one of our ASC’s from the equity method to the cost method resulted in the distributions from that location being booked as other revenue in 2014 resulting in a decrease of $1.2 million. Additionally, lower volumes and average reimbursement levels at one of our ASC’s in Pennsylvania resulted in a decrease of $0.4 million.

Salaries and benefits increased $2.2 million or 17.2% to $15.0 million from $12.8 million during the six months ended June 30, 2014, compared with the first six months of 2013. The increase in salaries and benefits was primarily due to:

— $1.0 million of stock compensation expense;

— $0.8 million of salaries and benefits at legacy Graymark; and

— $0.4 million due to increased salaries and benefits resulting from a combination of normal annual salary increases and increased personnel required to manage our expanding hospital operations.

Supplies expense increased $0.3 million or 2.9% to $10.6 million from $10.3 million during the six months ended June 30, 2014, compared with the first six months of 2013. The increase is due to a $0.9 million increase at our FSH SA facility driven by higher surgical case volumes compared to the first six months of 2013, offset by a $0.6 million decrease at our EEPMC facility related to lower overall surgical case volumes compared to the first six months of 2013.

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Other operating expenses increased $2.3 million or 14.5% to $18.2 million from $15.9 million during the six months ended June 30, 2014, compared with the first six months of 2013. The increase in other operating expenses was primarily due to:

— $0.6 million in increased facility lease expense and higher professional fees primarily related to increased audit and legal fees;

— $1.5 million of other operating expenses at legacy Graymark;

— $0.1 million increase in operating expense at our EEPMC and FSH SA facilities;

— $0.1 million decrease in out of state franchise taxes primarily related to our Maryland locations.

Depreciation and amortization represents the depreciation expense associated with our fixed assets and the amortization attributable to our intangible assets. Depreciation and amortization increased $0.6 million in the six months ended June 30, 2014 compared to the first six months of 2013. The increase was primarily due to $0.2 million related to additional information technology assets at our corporate offices and medical equipment assets at our EEPMC and FSH SA facilities and $0.4 million of depreciation and amortization at legacy Graymark.

Net other expense represents primarily interest expense on borrowings reduced by interest income earned on cash and cash equivalents and the gain or loss on the sale of equity investments in affiliates. Net other expense was $1.0 million in the six months ended June 30, 2014 and 2013.

Benefit for income taxes was $0.9 million for the six months of 2014. Prior to July 22, 2013, FSA’s member had elected to have FSA’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 our consolidated financial statements for periods prior to July 22, 2013. We have included pro forma income information in our consolidated statements of operations that provides an adjustment for income tax expense as if FSA and FSHA had been a C Corporation prior to July 22, 2013 at an assumed combined federal and state effective tax rate of 38%, which approximates the calculated statutory tax rates for the periods.

Discontinued operations represent the net loss from the operations of our independent diagnostic testing facilities (“IDTF”) which were classified as held for sale prior the Graymark reverse acquisition. The results from our discontinued operations for the six months ended June 30, 2014 are summarized below:

	2014
Revenue	$	123,728
Net loss before taxes		(692,462	)
Income tax benefit		191,424
Net loss from discontinued operations, net of tax	$	(501,038	)

Noncontrolling interests were allocated $0.8 million of net income during the six months ended June 30, 2014 compared to the first six months of 2013 when noncontrolling interests were allocated a net loss of $0.9 million. Noncontrolling interests are the equity ownership interests in our majority owned hospital subsidiaries, EEPMC and FSH SA.

Net income (loss) attributable to Foundation Healthcare. Our operations resulted in a net loss of $3.0 million during the six months ended June 30, 2014, compared to net income of $0.6 million during the first six months of 2013.

Liquidity and Capital Resources

Generally our liquidity and capital resource needs are funded from operations, loan proceeds and equity offerings. As of June 30, 2014, our liquidity and capital resources included cash and cash equivalents of $1.9 million and working capital of $2.1 million. As of December 31, 2013, our liquidity and capital resources included cash and cash equivalents of $4.2 million and working capital deficit of $15.0 million.

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Cash used in operating activities from continuing operations was $2.3 million during the six months ended June 30, 2014 compared to the first six months of 2013 when operating activities from continuing operations used $1.5 million. During the six months ended June 30, 2014, the primary sources of cash from operating activities from continuing operations were cash generated by income from continuing operations (net loss increased by non-cash items) of $1.7 million and increases in accrued liabilities and other liabilities totaling $4.7 million. During the six months ended June 30, 2014, the primary uses of cash from continuing operations, were increases in accounts receivables and other current and noncurrent assets totaling $6.5 million and a decrease in accounts payable and other current liabilities of $2.2 million. During the six months ended June 30, 2013, the primary uses of cash from operating activities from continuing operations were cash used by loss from continuing operations (net loss decreased by non-cash items) of $0.8 million and increases in accounts receivable and other current assets of $5.6 million. The primary source of cash from operating activities from continuing operations in the six months of 2013 was an increase in accrued liabilities of $3.4 million.

Cash used by operating activities from discontinued operations for the six months ended June 30, 2014 was $0.3 million. There were no discontinued operations during the six months ended June 30, 2013.

Net cash provided by investing activities from continuing operations during the six months ended June 30, 2014 was $0.7 million compared to the first six months of 2013 when investing activities from continuing operations used $0.1 million. Investing activities during the first six months of 2014 were primarily related to distributions received from equity investments of $1.3 million which were offset by purchases of property and equipment of $0.6 million. Investing activities during the first six months of 2013 were primarily related to distributions received from equity investments of $3.0 million which were offset by purchases of property and equipment of $2.9 million.

Net cash provided by financing activities from continuing operations during the six months ended June 30, 2014 was $3.6 million compared to the first six months of 2013 when financing activities from continuing operations provided $38 thousand. During the six months ended June 30, 2014 and 2013, we received debt proceeds of $28.5 million and $4.6 million, respectively, and we made debt payments of $22.8 million and $3.0 million, respectively. During the six months ended June 30, 2014 and 2013, we made distributions to noncontrolling interests of $1.6 million and $37 thousand, respectively. During the six months ended June 30, 2014 and 2013, we paid preferred noncontrolling dividends of $0.4 million and $0.8 million, respectively. During the six months ended June 30, 2013, we made distributions to FHA (prior to the reverse acquisition on July 22, 2013) of $0.7 million.

Cash used by financing activities from discontinued operations for the six months ended June 30, 2014 consisted of debt payments of $4.1 million. There were no discontinued operations during the six months ended June 30, 2013.

As of June 30, 2014, we had an accumulated deficit of $38.6 million, cash and cash equivalents of $1.9 million and working capital of $2.1 million. During the six months ended June 30, 2014, we generated a net loss attributable to Foundation Healthcare of $3.0 million and used $ 2.3 million in cash flow from operating activities from continuing operations. On June 30, 2014, we completed a refinancing of substantially all of our outstanding indebtedness through the execution of the SNB Credit Facility. The SNB Credit Facility includes a Term Loan in the amount of $27.5 million and a Revolving Loan in the amount of $2.5 million. We believe our cash on hand, the $2.5 million Revolving Loan and projected cash flow from operations will provide us enough liquidity to meet our cash requirements over the next 12 months. However, if our cash flows from operations do not meet or exceed our projections, we may need to raise additional funds through debt or equity financings. These uncertainties raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

SNB Credit Facility

Effective June 30, 2014, we entered into a Loan Agreement with Bank SNB, National Association, and Texas Capital Bank, together referred to as Lenders and collectively the agreement is referred to as the SNB Credit Facility.  The SNB Credit Facility was used to consolidate all of our and our subsidiaries’ debt in the principal amount of $27.5 million, which we refer to as the Term Loan, and provides for an additional revolving loan in the amount of $2.5 million, which we refer to as the Revolving Loan.  We have also entered into a number of ancillary agreements in connection with the SNB Credit Facility, including deposit account control agreements, subsidiary guarantees, security agreements and promissory notes.

Maturity Dates.  The Term Loan matures on June 30, 2021 and the Revolving Loan matures on June 30, 2016.

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Interest Rates.  The interest rate for the Term Loan and Revolving Loan is 30-day LIBOR plus the Applicable Margins based on our Senior Debt Ratio, as defined.  The Applicable Margins are as follows:

	Applicable Margin
Senior Debt Ratio	Revolving Loan	Term Loan
≥ 2.5x	3.75%	4.25%
< 2.5x, but ≥ 2.0x	3.25%	3.75%
< 2.0 x	2.75%	3.25%

The Applicable Margins are established at 3.75% for the Revolving Loan and 4.25% for the Term Loan through December 31, 2014.  Subsequent to December 31, 2014, the Applicable Margins will be adjusted on a quarterly basis based on our senior debt ratio.

The Senior Debt Ratio is calculated by dividing all of our indebtedness, including capital leases, that is secured by a lien or security interest in any of our assets by our EBITDA for the preceding four fiscal quarters.  EBITDA is defined in the SNB Credit Facility as our net income calculated before interest expense, provision for income taxes, depreciation and amortization expenses, stock compensation, gains arising from the write-up of assets, extraordinary gains and any one-time expenses approved by Bank SNB.

Interest and Principal Payments.  We are required to make quarterly payments of principal and interest on the Term Loan.  The first four quarterly payments on the Term Loan will be $875,000 plus all accrued and unpaid interest.  Each subsequent quarterly payment will be $1,000,000 plus all accrued and unpaid interest.  We are required to make quarterly payments on the Revolving Loan equal to the accrued and unpaid interest.  All unpaid principal and interest on the Term Loan and Revolving Loan must be paid on the respective maturity dates of June 30, 2021 and June 30, 2016.

Permitted Acquisitions.  We must obtain the Lenders approval for any acquisition, merger or consolidation in which the consideration paid for the acquisition, merger or consolidation is in excess of $1 million or for any acquisition, merger or consolidation in which the target entity’s operating income for the preceding 12 month period is less than zero.

Mandatory Prepayments.  If we sell any assets in excess of $100,000 or collectively sell any assets in a 12 month period in excess of $100,000, we must make a prepayment equal to the net proceeds of the asset sale(s).  If we receive proceeds from a debt or equity offering that is not used for a Permitted Acquisition over a 12 month period following the offering or for repayment of our preferred noncontrolling interests, we must make a prepayment equal to the net proceeds of the debt or equity offering.  Subsequent to the completion of our annual audited financial statements, we must make a prepayment equal to 30% of our Excess Cash Flow which is defined as the amount of EBITDA (as defined in the SNB Credit Facility) for the fiscal year that exceeds the sum of debt service payments plus capital expenditures plus cash payments for federal, state and local income taxes, plus distributions made by our Equity Owned Hospitals to persons other than us.

Voluntary Prepayments.  We may prepay amounts under the Term Loan at any time provided that we are required to pay a prepayment penalty of 2% of the amount prepaid if payment is made prior to the first anniversary, 1.5% if the prepayment is made after the first anniversary but prior to the second anniversary and 1% if the prepayment is made after the second anniversary but prior to the maturity date.  We may prepay amounts under the Revolving Loan at any time without penalty.

Guaranties.  Each of our direct or indirect wholly-owned subsidiaries jointly and severally and unconditionally guaranty payment of our obligations owed to Lenders.

Financial Covenants:

Senior Debt Ratio.  We must maintain a Senior Debt Ratio not in excess of 3.00 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014.

Senior Debt Service Coverage Ratio.  We must maintain a Senior Debt Service Coverage Ratio of not less than 1.30 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014. The Senior Debt Service Coverage ratio is the ratio of EBITDA (as defined in the SNB Credit Facility) for the preceding four fiscal quarters minus cash payments for federal, state and local taxes, minus capital expenditures to our debt service payments for the same period.

Adjusted Senior Debt Service Coverage Ratio.  We must maintain an Adjusted Senior Debt Service Coverage Ratio of not less than 1.05 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014. The Adjusted Senior Debt Service Coverage Ratio is the ratio of EBITDA (as defined in the SNB Credit Facility) for the preceding four fiscal quarters minus cash payments for federal, state and local taxes, minus capital expenditures, plus distributions made to our preferred noncontrolling interest holders, plus distributions made by our Equity Owned Hospitals to persons other than us to our debt service payments for the same period.

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Minimum EBITDA.  We must have EBITDA of not less than $2 million for the fiscal quarter ended on June 30, 2014. Our EBITDA adjusted for certain onetime expenses, which were approved by Bank SNB, was in excess of $2 million.

Annualized EBITDA.  Until June 30, 2015 and for purposes of calculating compliance with the financial covenants in SNB Credit Facility, EBITDA shall be determined by annualizing EBITDA for the fiscal quarter ending on September 30, 2014 and each quarter that has elapsed thereafter.

Restrictions on Indebtedness.  We and our Equity Owned Hospitals are not allowed to create any indebtedness other than indebtedness for the purchase of fixed assets not exceeding $500,000 in any fiscal year, trade payables incurred in the ordinary course of business and not past due, contingent obligations and unsecured indebtedness not exceeding $100,000 in the aggregate at any time outstanding.

Use of Proceeds.  All proceeds of the Term Loan were used solely for the refinancing of existing indebtedness.  The proceeds of the Revolving Loan will be used for working capital.

Collateral.  Payment and performance of our obligations under the SNB Credit Facility are secured in general by all of our assets.

Defaults and Remedies.  In addition to the general defaults of failure to perform our obligations under the Loan Agreement, events of default also include the occurrence of a change in control, as defined, and the loss of our Medicare or Medicaid certification, collateral casualties, entry of a judgment of $150,000 or more, failure of first liens on collateral and the termination of any of our management agreements that represent more than 10% of our management fees for the preceding 18 month period.  In the event of a monetary default, all of our obligations due under the SNB Credit Facility shall become immediately due and payable.  In the event of a non-monetary default, we have 10 days or in some cases three days to cure before Bank SNB has the right to declare our obligations due under the SNB Credit Facility immediately due and payable.

Financial Commitments

Our future commitments under contractual obligations by expected maturity date at June 30, 2014 are as follows:

	< 1 year		1-3 years		3-5 years		> 5 years		Total
Short-term debt (1)	$	635,105	$	—	$	—	$	—	$	635,105
Long-term debt (1)		4,245,993		10,700,898		9,608,904		11,066,372		35,622,167
Operating leases		11,926,757		24,505,396		24,109,054		89,976,358		150,517,565
Other long term liabilities		30,000		25,000		—		—		55,000
Preferred noncontrolling interest (2)		1,600,872		2,739,228		6,533,090		—		10,873,190
Total	$	18,438,728	$	37,970,522	$	40,251,048	$	101,042,730	$	197,703,028

(1) Includes principal and interest obligations.

(2) Represents the redemption obligation, including interest, of our preferred noncontrolling interests.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management’s prudent judgments and estimates. Actual results may differ from these estimates. Management believes that any reasonable deviation from those judgments and estimates would not have a material impact on our consolidated financial position or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of earnings and corresponding balance sheet accounts would be necessary. These adjustments would be made in future statements. For a complete discussion of all our significant accounting policies please see our 2013 annual report on Form 10-K. Some of the more significant estimates include revenue recognition, allowance for doubtful accounts, and goodwill and intangible asset impairment. We use the following methods to determine our estimates:

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Revenue recognition and accounts receivable – We recognize revenues in the period in which services are performed. Accounts receivable primarily consist of amounts due from third-party payors and patients. Our ability to collect outstanding receivables is critical to its results of operations and cash flows. Amounts we 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 our established billing rates. Additionally, to provide for accounts receivable that could become uncollectible in the future, we establish 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 our consolidated financial statements are recorded at the net amount expected to be received.

Contractual Discounts and Cost Report Settlements – We derive a significant portion of our revenues from Medicare, Medicaid and other payors that receive discounts from its established billing rates. We 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. We estimate 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 our 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 our 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.

Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. We believe that we are 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 our 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; we establish 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.

We have 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 we 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 our 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 our policies.

Due to the nature of the healthcare industry and the reimbursement environment in which we operate, certain estimates are required to record net revenues and accounts receivable at their net realizable values at the time 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 our 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 our 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, we are not certain of the full amount of patient responsibility at the time of service. We estimate 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.

Goodwill and Intangible Assets – We 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.

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Intangible assets other than goodwill which include physician membership interests, service contracts and covenants not to compete are amortized over their estimated useful lives using the straight line method. The remaining lives range from five to seven years. We evaluate the recoverability of identifiable intangible asset whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.

Adopted Guidance

In February 2013, the FASB issued changes to the accounting for obligations resulting from joint and several liability arrangements. These changes require an entity to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of (i) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and (ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. An entity will also be required to disclose the nature and amount of the obligation as well as other information about those obligations. Examples of obligations subject to these requirements are debt arrangements and settled litigation and judicial rulings. These changes become effective for us on January 1, 2014. We have determined that the adoption of these changes did not have an impact on our consolidated financial statements, as we do not currently have any such arrangements.

In July 2013, the FASB issued changes to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Previously, there was diversity in practice as no explicit guidance existed. These changes become effective us on January 1, 2014. We have determined that the adoption of these changes did not have a significant impact on our consolidated financial statements

Issued Guidance

In April 2014, the FASB issued changes to the reporting of discontinued operations and disclosures of disposals of components of an entity. The amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The amendments are effective prospectively for all disposals (or classifications as held for sale) of components of an entity, and for all businesses that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. We are currently evaluating the new guidance to determine the impact it may have to our consolidated financial statements.

In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. These changes become effective for us on January 1, 2017. We are currently evaluating the potential impact of these changes on our consolidated financial statements.

Cautionary Statement Relating to Forward Looking Information

We have included some forward-looking statements in this section and other places in this report regarding our expectations. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, business plans or objectives, levels of activity, performance or achievements, or industry results, to be materially different from any future results, business plans or objectives, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Some of these forward-looking statements can be identified by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategies that involve risks and uncertainties. You should read statements that contain these words carefully because they

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— discuss our future expectations;

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

— state other “forward-looking” information.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are a smaller reporting entity as defined in Rule 12b-2 of the Exchange Act and as such, are not required to provide the information required by Item 305 of Regulation S-K with respect to Quantitative and Qualitative Disclosures about Market Risk.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management (with the participation of our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of June 30, 2014. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer concluded that these disclosure controls and procedures are effective.

On July 22, 2013, we completed our acquisition of Foundation. As permitted by the Securities and Exchange Commission under the current year acquisition scope exception, we excluded the Foundation acquisition from our 2013 assessment of the effectiveness of our internal control over financial reporting since it was not practicable for management to conduct an assessment of internal control over financial reporting between the acquisition date and the date of management’s assessment. However, we have extended our oversight and monitoring processes that support our internal control over financial reporting to include Foundation’s operations. During our monitoring of the internal controls over financial reporting at Foundation, we identified the material weaknesses noted below.

Description and Remediation of Material Weaknesses in Internal Controls over Financial Reporting

The internal controls at Foundation do not include sufficient independent internal review and approval of critical accounting schedules used in the preparation of financial statements. In addition, the internal controls at Foundation do not include sufficient review and approval of the accounting impact and treatment of material contracts and agreements. We have begun the remediation process for these material weaknesses by establishing review and approval procedures that extend to the operations of Foundation, but since we have not completed an assessment of the effectiveness of these and the other internal controls at Foundation. To complete the remediation process, we have developed a plan and related timeline to design a set of control procedures and the related required documentation thereof in order to address these material weakness. We have targeted to have these internal controls in place by the end of the third quarter of 2014. Specifically, we intend to engage a consultant to assist us in the identification of required key controls, the necessary steps required for procedures to ensure the appropriate independent review and approval of critical accounting schedules and the independent review and assessment of the accounting treatment of material contracts and agreements.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

In the normal course of business, we may become involved in litigation or in legal proceedings. We are not aware of any such litigation or legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition and results of operations.

Item 1A. Risk Factors.

There are material changes from the risk factors previously disclosed in our 2013 Annual Report on Form 10-K are as follows:

If our operating results do not meet or exceed our projections, we may be unable to continue operations and could be forced to substantially curtail operations or cease operations all together.

On June 30, 2014, we completed a refinancing of substantially all of our outstanding indebtedness through the execution a Loan Agreement with Bank SNB, National Association, and Texas Capital Bank, together referred to as Lenders and collectively the agreement is referred to as the SNB Credit Facility.  The SNB Credit Facility provides for a term loan in the principal amount of $27.5 million, referred to as the Term Loan, and a revolving line of credit of $2.5 million, referred to as the Revolving Loan, for total principal of $30 million. We believe our cash on hand, the $2.5 million Revolving Loan and projected cash flow from operations will provide us enough liquidity to meet our cash requirements over the next 12 months. However, if our cash flows from operations do not meet or exceed our projections, we may need to raise additional funds through debt or equity financings. These uncertainties raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

We have a bank credit facility of approximately $30 million and we may not achieve compliance with certain financial covenants which begin September 30, 2014.

Under the Loan Agreement covering the SNB Credit Facility and commencing with the calendar quarter ending September 30, 2014 and thereafter during the term of the SNB Credit Facility, based on the latest four rolling quarters, we agreed to continuously maintain compliance with the following financial covenants (collectively referred to as “Debt Ratios”):

Senior Debt Ratio.  We must maintain a Senior Debt Ratio not in excess of 3.00 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014.

Senior Debt Service Coverage Ratio.  We must maintain a Senior Debt Service Coverage Ratio of not less than 1.30 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014.

Adjusted Senior Debt Service Coverage Ratio.  We must maintain an Adjusted Senior Debt Service Coverage Ratio of not less than 1.05 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014.

As of June 30, 2014, our Debt Ratios are less than the minimum required ratios. The Debt Ratios are calculated using the latest four rolling quarters. Until June 30, 2015 and for purposes of calculating compliance with the financial covenants in SNB Credit Facility, EBITDA shall be determined by annualizing EBITDA for the fiscal quarter ending on September 30, 2014 and each quarter that has elapsed thereafter. Based on our projected results for the quarter ending September 30, 2014, we believe we will achieve compliance with the Debt Ratios. If we are unsuccessful in achieving compliance with the Debt Ratios, there is no assurance that our lenders will waive or delay the requirement.

In the event we receive a notice of default from the Lenders and the default is not cured within 10 days following notice, the Lenders will have the right to declare the outstanding principal and accrued and unpaid interest immediately due and payable. If the Lenders accelerate the payment of outstanding principal and interest, we will need to file a current report on Form 8-K with the SEC disclosing the event of default and the acceleration of payment of all principal and interest. In addition, we do not expect to be able to pay all outstanding principal and interest if the Lenders accelerate the due dates for such amounts. Since we have granted the Lenders a security interest in all of our assets, the Lenders could elect to foreclose on such assets. If the Lenders declare an event of default and/or accelerates the payment of our obligations under the SNB Credit Facility, then the disclosure of such fact may cause a material decrease in the price of our stock on the OTCQB. The declaration of an event of default and the move to foreclose on our assets may cause a material adverse effect on our ability to operate our business in the ordinary course of business as well as a material adverse effect on our liquidity, results of operations and financial position.

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

Cashless Stock Grant Vesting. During May 2014, we acquired, by means of net share settlements, 75,800 shares of Foundation common stock, at a price of $0.51 per share, related to the vesting of an employee restricted stock award to satisfy withholding tax obligations. We do not have any on-going stock repurchase programs.

Item 3. Defaults Upon Senior Securities.

We do not have anything to report under this Item.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

We do not have anything to report under this Item.

Item 6. Exhibits.

(a) Exhibits:

Exhibit No.	Description
10.1	Second Amendment to Second Amended and Restated Loan Agreement, dated April 30, 2013, among SDC Holdings, LLC, ApothecaryRx, LLC, Graymark Healthcare, Inc., Stanton M. Nelson, and Arvest Bank, is incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 19, 2014.
10.2	Third Amended and Restated Promissory Note, dated April 30, 2013, among SDC Holdings, LLC and ApothecaryRx, LLC in favor of Arvest Bank, is incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 19, 2014.
10.3	Foundation Healthcare, Inc. 2014 Bonus Incentive Plan for Executive Officers, is incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 19, 2014.
10.4	Loan, Security and Guaranty Agreement, dated June 30, 2014, by and between Foundation Healthcare, Inc. and Bank SNB, National Association and Texas Capital Bank, is incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on July 1, 2014.
31.1+	Certification of Stanton Nelson, Chief Executive Officer of Registrant.
31.2+	Certification of Hubert King, Chief Financial Officer of Registrant.
31.3+	Certification of Grant A. Christianson, Chief Accounting Officer of Registrant.
32.1+	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 of Stanton Nelson, Chief Executive Officer of Registrant.
32.2+	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 of Hubert King, Chief Financial Officer of Registrant.
32.3+	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 of Grant A. Christianson, Chief Accounting Officer of Registrant.
101. INS	XBRL Instance Document.
101. SCH	XBRL Taxonomy Extension Schema Document.
101. CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101. DEF	XBRL Taxonomy Extension Definition Linkbase Document.

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Exhibit No.	Description
101. LAB	XBRL Taxonomy Extension Label Linkbase Document.
101. PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

+ Filed herewith.

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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 thereunto duly authorized.

	FOUNDATION HEALTHCARE, INC.
	(Registrant)
	By:	/S/ STANTON NELSON
		Stanton Nelson
		Chief Executive Officer
		(Principal Executive Officer)
Date: August 14, 2014
	By:	/S/ HUBERT KING
		Hubert King
		Chief Financial Officer
		(Principal Financial Officer)
Date: August 14, 2014
	By:	/S/ GRANT A. CHRISTIANSON
		Grant A. Christianson
		Chief Accounting Officer
		(Principal Accounting Officer)
Date: August 14, 2014

34

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Stanton Nelson, certify that:

1. I have reviewed this Form 10-Q for the period ended June 30, 2014 of Foundation Healthcare, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2014

/S/ STANTON NELSON

Stanton Nelson

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Hubert King, certify that:

1. I have reviewed this Form 10-Q for the period ended June 30, 2014 of Foundation Healthcare, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2014

/S/ HUBERT KING

Hubert King

Chief Financial Officer

(Principal Financial Officer)

EX-31.3

Exhibit 31.3

CERTIFICATION

I, Grant A. Christianson, certify that:

1. I have reviewed this Form 10-Q for the period ended June 30, 2014 of Foundation Healthcare, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2014

/S/ GRANT A. CHRISTIANSON

Grant A. Christianson

Chief Accounting Officer

(Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of Foundation Healthcare, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2014 (the “Quarterly Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 14, 2014	/S/ STANTON NELSON
	Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial Officer of Foundation Healthcare, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2014 (the “Quarterly Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 14, 2014	/S/ HUBERT KING
	Chief Financial Officer (Principal Financial Officer)

EX-32.3

Exhibit 32.3

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Accounting Officer of Foundation Healthcare, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2014 (the “Quarterly Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 14, 2014	/S/ GRANT A. CHRISTIANSON
	Chief Accounting Officer (Principal Accounting Officer)

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Amortization Expense for Next Five Years Related to Intangible Assets (Detail) (USD $)	Jun. 30, 2014
Finite Lived Intangible Assets [Line Items]
2015	$ 2,055,474
2016	2,055,474
2017	2,055,474
2018	1,618,673
2019	1,145,607
Thereafter	$ 1,180,184

XML

Related Party Transactions - Additional Information (Detail) (USD $)					0 Months Ended	6 Months Ended		6 Months Ended			1 Months Ended	12 Months Ended	1 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Minimum	Jun. 30, 2014 Maximum	Jun. 01, 2014 New Sleep Lab International, Ltd.	Jun. 30, 2014 New Sleep Lab International, Ltd.	Dec. 31, 2013 Notes Payable to Banks	Jun. 30, 2014 Shareholders And Affiliates Minimum	Jun. 30, 2014 Shareholders And Affiliates Maximum	Jun. 30, 2014 City Place	Oct. 31, 2013 Foundation Health Enterprises Llc	Dec. 31, 2013 Foundation Health Enterprises Llc	Oct. 31, 2013 Foundation Health Enterprises Llc Class B member interests	Dec. 31, 2013 Foundation Health Enterprises Llc Class B member interests	Dec. 31, 2013 Foundation Health Enterprises Llc Private placement	Oct. 31, 2013 Foundation Health Enterprises Llc Private placement
Related Party Transaction [Line Items]
Income on underlying sub-lease					$ 8,767
Sublease expiration date					Nov. 30, 2018
Lease expense						8,767				47,000
Related party deposit	900,000
Notes payable							5,900,000
Interest rates on the notes								5.00%	10.00%
Offering cost											100,000	100,000	105,000	105,000	9,135,000	9,135,000
Number offering units											5		87
Common stock issued											10,000	10,000
Common stock value	17,132	16,383									5,000	5,000
Amount of Purchase by CEO											525,000
Lease agreement monthly rent description										The Company occupies office space subject to a lease agreement with City Place, LLC (“City Place”). Under the lease agreement, the Company pays monthly rent of $17,970 until June 30, 2014; $0.00 from July 1, 2014 to January 31, 2015 and $17,970 from February 1, 2015 to March 31, 2017 plus additional payments for allocable basic expenses of City Place
Lease expiration date										Mar. 31, 2017
Obligations owed to FHA and other affiliates	$ 1,400,000	$ 1,400,000
Management fee Percentages range			2.25%	6.00%

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Commitments and Contingencies - Additional Information (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Commitments And Contingencies Disclosure [Line Items]
Legal claims settlement expenses	$ 0	$ 0
Self Insurance Reserves	$ 484,764

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Operating Results and Balance Sheet Items of Discontinued Operations (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Discontinued Operations And Disposal Groups [Abstract]
Revenue	$ 123,728
Net loss before taxes	(692,462)
Income tax benefit	191,424
Net loss from discontinued operations, net of tax	(501,038)
Cash and cash equivalents		49,252
Accounts receivable, net of allowances		222,943
Inventories		1,893
Other current assets	165,030	244,541
Total current assets	165,030	518,629
Fixed assets, net	300,529	426,228
Other assets	150,000	150,000
Total non-current assets	450,529	576,228
Total assets	615,559	1,094,857
Payables and accrued liabilities	1,249,217	1,557,771
Short-term debt		3,994,932
Current portion of long-term debt		67,994
Total current liabilities	1,249,217	5,620,697
Long-term debt, net of current portion		9,969
Total liabilities	$ 1,249,217	$ 5,630,666

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Basis of Presentation - Additional Information (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Dec. 31, 2012
Basis Of Presentation [Line Items]
Accumulated deficit	$ (38,573,934)		$ (38,573,934)		$ (35,171,315)
Cash and cash equivalents	1,875,669	1,715,167	1,875,669	1,715,167	4,212,076	3,037,067
Working capital	2,100,000		2,100,000
Net income (loss) attributable to Foundation Healthcare	(1,314,044)	957,093	(3,016,481)	617,358
Cash flow from operating activities from continuing operations			(2,326,114)	(1,473,394)
Long term debt	28,657,826		28,657,826		17,950,911
Term Loan
Basis Of Presentation [Line Items]
Long term debt	27,500,000		27,500,000
Revolving Loan
Basis Of Presentation [Line Items]
Revolving loan	$ 2,500,000		$ 2,500,000

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Borrowings and Capital Lease Obligations - Additional Information (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Debt Instrument [Line Items]
Long term debt	$ 28,657,826	$ 17,950,911
Permitted merger or acquisition consideration amount	1,000,000
Sale of assets, maximum limit	100,000
Percentage of prepayment on excess cash flow	30.00%
Prepayment penalty percentage on term loan prior to first Anniversary	2.00%
Prepayment penalty percentage on term loan after first anniversary	1.50%
Prepayment penalty percentage on term loan after second anniversary	1.00%
Senior debt ratio	3.00
Senior debt service coverage ratio	1.30
Adjusted senior debt service coverage ratio	1.05
Minimum EBITDA	2,000,000
Restriction on indebtedness in trade payable, maximum	500,000
Restriction on indebtedness in unsecured debt, maximum	100,000
Amount of judgment triggering default	150,000
Debt default, description	In addition to the general defaults of failure to perform our obligations under the Loan Agreement, events of default also include the occurrence of a change in control, as defined, and the loss of our Medicare or Medicaid certification, collateral casualties, entry of a judgment of $150,000 or more, failure of first liens on collateral and the termination of any of our management agreements that represent more than 10% of our management fees for the preceding 18 month period. In the event of a monetary default, all of our obligations due under the SNB Credit Facility shall become immediately due and payable. In the event of a non-monetary default, we have 10 days or in some cases three days to cure before Bank SNB has the right to declare our obligations due under the SNB Credit Facility immediately due and payable.
Term Loan
Debt Instrument [Line Items]
Long term debt	27,500,000
Debt instrument maturity date	Jun. 30, 2021
Debt instrument applicable margin	4.25%
Term Loan | First Four Quarterly Payments
Debt Instrument [Line Items]
Quarterly principal payment	875,000
Term Loan | Subsequent Quarterly Payments
Debt Instrument [Line Items]
Quarterly principal payment	1,000,000
Revolving Loan
Debt Instrument [Line Items]
Revolving loan	$ 2,500,000
Debt instrument maturity date	Jun. 30, 2016
Debt instrument applicable margin	3.75%

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Changes in Carrying Amount of Intangible Assets (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Goodwill [Line Items]
Intangible asset carrying amount, beginning balance	$ 14,524,500		$ 14,524,500		$ 14,524,500
Intangible asset carrying amount, Amortization	513,868	446,218	1,027,735	896,960
Intangible asset carrying amount, ending balance	14,524,500		14,524,500		14,524,500
Intangible asset accumulated amortization, beginning balance			(3,385,879)
Intangible asset, accumulated amortization			(1,027,735)
Intangible asset accumulated amortization, ending balance	(4,413,614)		(4,413,614)
Intangible asset beginning balance, net			11,138,621
Intangible asset amortization, net	(513,868)	(446,218)	(1,027,735)	(896,960)
Intangible asset ending balance, net	$ 10,110,886		$ 10,110,886

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Real Estate Transaction - Additional Information (Detail) (San Antonio Texas, USD $)	0 Months Ended
	Mar. 01, 2014
San Antonio Texas
Real Estate Properties [Line Items]
Operating Leases, Term of Contract	15 years
Annual rental payments	$ 2,300,000
Percentage of annual lease escalations	3.00%
Income on underlying sub-lease	2,100,000
Cash received	$ 4,100,000

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Reverse Acquisition

6 Months Ended

Jun. 30, 2014

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.

Simultaneous with and subject to the reverse acquisition, the Company issued 13,333,333 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 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 final purchase allocation for the reverse acquisition is presented in the table below:

	Graymark
Assets acquired
Cash and cash equivalents	$	68,170
Accounts receivable		249,333
Current assets from discontinued operations		1,360,143
Other current assets		198,976
Total current assets		1,876,622
Property and equipment		1,389,169
Intangible assets		2,733,000
Goodwill		21,864,781
Other assets		252,528
Other assets from discontinued operations		1,224,140
Total assets acquired	$	29,340,240
Liabilities assumed
Accounts payable and accrued liabilities	$	2,899,823
Short term debt		2,000,000
Current portion of long term debt		714,711
Current liabilities from discontinued operations		7,375,521
Total current liabilities		12,990,055
Long term debt		742,385
Other liabilities		305,969
Other liabilities from discontinued operations		1,362,957
Total liabilities assumed		15,401,366
Net assets acquired	$	13,938,874

During the six months ended June 30, 2013, the Company incurred $138,542 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 six months ended June 30, 2014, and the revenue and earnings of the combined entity had the reverse acquisition date for Graymark been January 1, 2013 are as follows:

									Attributable to Foundation
	Revenue		Loss From Continuing Operations			Net Loss			Net Loss			Net Loss Per Share
Actual:
From 1/1/2014 to 6/30/2014	$	1,036,089	$	(2,633,975	)	$	(2,909,171	)	$	(2,909,171	)	$	(0.02	)
Supplemental Pro Forma:
From 1/1/2013 to 6/30/2013	$	44,993,767	$	(5,959,633	)	$	(4,606,396	)	$	(3,594,748	)	$	(0.21	)

The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

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Schedule of Applicable Margins Rate (Detail)	6 Months Ended
	Jun. 30, 2014
Revolving Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	3.75%
Term Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	4.25%
Senior Debt Ratio, ≥ 2.5x | Revolving Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	3.75%
Senior Debt Ratio, ≥ 2.5x | Term Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	4.25%
Senior Debt Ratio, 2.5x, but ≥ 2.0x | Revolving Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	3.25%
Senior Debt Ratio, 2.5x, but ≥ 2.0x | Term Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	3.75%
Senior Debt Ratio, 2.0 x | Revolving Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	2.75%
Senior Debt Ratio, 2.0 x | Term Loan
Debt Instrument [Line Items]
Debt instrument applicable margin	3.25%

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Final Purchase Allocation for Reverse Acquisition (Detail) (USD $)	Jun. 30, 2014	Dec. 31, 2013	Jul. 22, 2013
Assets acquired
Goodwill	$ 973,927	$ 973,927
Liabilities assumed
Total liabilities assumed			2,000,000
Graymark | Foundation Health Care Affiliates, LLC
Assets acquired
Cash and cash equivalents	68,170
Accounts receivable	249,333
Current assets from discontinued operations	1,360,143
Other current assets	198,976
Total current assets	1,876,622
Property and equipment	1,389,169
Intangible assets	2,733,000
Goodwill	21,864,781
Other assets	252,528
Other assets from discontinued operations	1,224,140
Total assets acquired	29,340,240
Liabilities assumed
Accounts payable and accrued liabilities	2,899,823
Short term debt	2,000,000
Current portion of long term debt	714,711
Current liabilities from discontinued operations	7,375,521
Total current liabilities	12,990,055
Long term debt	742,385
Other liabilities	305,969
Other liabilities from discontinued operations	1,362,957
Total liabilities assumed	15,401,366
Net assets acquired	$ 13,938,874

XML

Reverse Acquisition - Additional Information (Detail) (USD $)	0 Months Ended
	Jul. 22, 2013	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Business Acquisition [Line Items]
Promissory note	$ 2,000,000
Assumed certain liabilities and obligations	2,000,000
Common stock issued, shares		171,323,381	163,834,886
Common stock issued, amount		17,132	16,383
Incurred expenses				138,542
Arvest Loan Participation
Business Acquisition [Line Items]
Common stock issued, shares	13,333,333
Common stock issued, amount	6,000,000
Roy T. Oliver
Business Acquisition [Line Items]
Common stock issued, shares	17,970,295
Common stock issued, amount	8,136,390
Percentage of ownership in shareholders and affiliates	5.00%
Foundation
Business Acquisition [Line Items]
Number of shares issued in connection with acquisition	114,500,000
Promissory note	2,000,000
Assumed certain liabilities and obligations	2,000,000
Foundation Health Care Affiliates, LLC
Business Acquisition [Line Items]
Fair value of consideration issued in reverse acquisition	17,400,000
Foundation Arvest Bank And Roy Oliver
Business Acquisition [Line Items]
Net assets acquired	$ 13,400,000

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Future Maturities Long-Term Debt (Detail) (USD $)	Jun. 30, 2014
Maturities of Long-term Debt [Abstract]
2015	$ 3,146,727
2016	4,226,915
2017	4,209,171
2018	4,052,562
2019	4,022,451
Thereafter	$ 9,000,000

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Acquisition Revenue and Earnings of Combined Entity Reverse Acquisition (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Business Acquisition [Line Items]
Revenue	$ 22,079,567	$ 21,645,119	$ 43,711,358	$ 39,082,045
Loss from Continuing Operations	(664,027)	1,169,037	(1,669,220)	(262,729)
Net Loss	(852,743)	1,169,037	(2,170,258)	(262,729)
Net Loss Attributable to Foundation	(1,314,044)	957,093	(3,016,481)	617,358
Net Loss Per Share Attributable to Foundation	$ (0.01)	$ 0.00	$ (0.02)	$ 0.00
Graymark
Business Acquisition [Line Items]
Revenue			1,036,089
Loss from Continuing Operations			(2,633,975)
Net Loss			(2,909,171)
Net Loss Attributable to Foundation			(2,909,171)
Net Loss Per Share Attributable to Foundation			$ (0.02)
Supplemental Pro Forma, Revenues				44,993,767
Supplemental Pro Forma, Loss from Continuing Operations				(5,959,633)
Supplemental Pro Forma, Net Loss				(4,606,396)
Supplemental Pro Forma, Net Loss Attributable to Foundation				$ (3,594,748)
Supplemental Pro Forma, Net Loss Per Share Attributable to Foundation				$ (0.21)

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Discontinued Operations - Additional Information (Detail) (USD $)					3 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Term Loan	Jun. 30, 2014 Revolving Loan	Oct. 31, 2013 Sleep diagnostic locations Location	Oct. 31, 2013 Sleep Therapy Business Location
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Number of locations closed or sold					24	5
Amount of special charge liability acquired as part of reverse acquisition	$ 475,570
Outstanding debt under SNB credit facility	28,657,826	17,950,911	27,500,000
Outstanding debt under SNB credit facility				$ 2,500,000

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Summary of Significant Accounting Policies

Note 3 – Summary of Significant Accounting Policies

For a complete list of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the year ending December 31, 2013.

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 three months and six months ended June 30, 2014 are not necessarily indicative of results that may be expected for the year ended December 31, 2014. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2013. The December 31, 2013 consolidated balance sheet was derived from audited financial statements.

Pro forma income information – Prior to July 22, 2013, FSA’s and FSHA’s member had elected to have FSA’s and FSHA’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 tax returns and no provision for income taxes is included in the Company’s consolidated financial statements for periods prior to July 22, 2013. The pro forma income information provides an adjustment for income tax expense as if FSA and FSHA had been a C Corporation prior to July 22, 2013 at an assumed combined federal and state effective tax rate of 38%, which approximates the calculated statutory tax rates for the periods.

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

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 shares 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.

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, Medicaid and Tricare 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. The estimated net cost report settlements due to the Company were $521,555 and $235,000 as of June 30, 2014 and December 31, 2013 respectively, and are included in prepaid and other current assets in the accompanying consolidated balance sheets. We adjusted our cost report estimate by $286,555 during the six months ended June 30, 2014 based on our final filed cost report for 2013 and an estimate of the 2014 cost report.  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.

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. During the Company’s normal quarterly review process at March 31, 2014, management determined that a portion of the accounts receivable related to personal injury cases at our FSH SA location had grown to a level requiring it to be analyzed as a distinct payor category. Based on the historical cash collection experience and other analytical measures as noted above, the allowance for doubtful accounts related to the personal injury cases was lowered by $1.0 million.

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 allowance for doubtful accounts for the six months ending June 30, 2014 follows:

	2014
Balance at beginning of period	$	4,778,915
Provisions recognized as reduction in revenues		1,237,090
Write-offs, net of recoveries		(3,753,215	)
Balance at end of period	$	2,262,790

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.

Restricted Cash – As of June 30, 2014 and December 31, 2013, the Company had restricted cash of approximately $3.4 million and $0.7 million respectively, included in prepaid and other current assets in the accompanying consolidated balance sheets.  The restricted cash at June 30, 2014 is related to the SNB Credit Facility (see Note 7 – Borrowings and Capital Lease Obligations) and represents the proceeds from the Term Loan that were not utilized as of June 30, 2014 to retire existing debt (“SNB Restricted Cash”).  The SNB Restricted Cash can be utilized to complete the payoff of the remaining indebtedness of the Company and to pay federal and state income taxes.  Use of the SNB Restricted Cash must be approved by Bank SNB.  The restricted cash at December 31, 2013 was pledged as collateral against debt that was paid-off from the proceeds of the SNB Credit Facility.

Goodwill and Intangible Assets – 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 will complete its annual impairment test in December 2014.

Intangible assets other than goodwill which include physician membership interests, service contracts and covenants not to compete are amortized over their estimated useful lives using the straight line method. The remaining lives range from five to ten 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.

Net income (loss) per share – Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an anti-dilutive effect on diluted loss per share are excluded from the calculation.

Recently Adopted and Recently Issued Accounting Guidance

Adopted Guidance

In February 2013, the FASB issued changes to the accounting for obligations resulting from joint and several liability arrangements. These changes require an entity to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of (i) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and (ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. An entity will also be required to disclose the nature and amount of the obligation as well as other information about those obligations. Examples of obligations subject to these requirements are debt arrangements and settled litigation and judicial rulings. These changes become effective for the Company on January 1, 2014. Management has determined that the adoption of these changes did not have an impact on the Company’s consolidated financial statements, as the Company does not currently have any such arrangements.

In July 2013, the FASB issued changes to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Previously, there was diversity in practice as no explicit guidance existed. These changes become effective for the Company on January 1, 2014. Management has determined that the adoption of these changes did not have a significant impact on the Company’s consolidated financial statements.

Issued Guidance

In April 2014, the FASB issued changes to the reporting of discontinued operations and disclosures of disposals of components of an entity. The amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The amendments are effective prospectively for all disposals (or classifications as held for sale) of components of an entity, and for all businesses that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. These changes become effective for the Company on January 1, 2017. Management is currently evaluating the potential impact of these changes on the Company’s consolidated financial statements.

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Activity in Acquired Accruals for Restructuring Charges Established for Lease Termination Costs (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Ending Balance	$ 475,570
Lease Termination Costs
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Beginning Balance	78,235
Adjustments	139,940
Cash Payments	(20,575)
Ending Balance	$ 197,600

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Schedule of Short-Term Debt Obligations (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014		Dec. 31, 2013
Short Term Debt [Line Items]
Short term debt	$ 630,478		$ 5,664,827
Insurance premium financings
Short Term Debt [Line Items]
Debt instrument, effective interest rate	3.90%	[1]
Debt instrument, effective interest rate, minimum	4.80%	[1]
Short term debt	583,663		101,135
Note Payable Medicare Cost Report
Short Term Debt [Line Items]
Debt instrument, effective interest rate, maximum	10.10%	[1]
Short term debt	46,815		84,065
Note payable - Legacy
Short Term Debt [Line Items]
Short term debt			2,814,027
Note payable - S&H leasing
Short Term Debt [Line Items]
Short term debt			1,865,600
Note payable - working capital
Short Term Debt [Line Items]
Short term debt			$ 800,000

[1] Effective rate as of June 30, 2014

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Condensed Consolidated Balance Sheets (Unaudited) (USD $)	Jun. 30, 2014	Dec. 31, 2013
ASSETS
Cash and cash equivalents	$ 1,875,669	$ 4,212,076
Accounts receivable, net of allowances for doubtful accounts of $2,262,790 and $4,778,915, respectively	13,045,004	12,755,642
Receivables from affiliates	938,538	848,002
Supplies inventories	1,906,963	1,931,142
Prepaid and other current assets	9,038,400	4,302,885
Current assets from discontinued operations	165,030	518,629
Total current assets	26,969,604	24,568,376
Property and equipment, net	10,780,857	12,073,986
Equity method investments in affiliates	5,804,919	5,699,093
Intangible assets, net	10,110,886	11,138,621
Goodwill	973,927	973,927
Other assets	446,274	244,598
Other assets from discontinued operations	450,529	576,228
Total assets	55,536,996	55,274,829
Liabilities:
Accounts payable	10,288,809	11,648,987
Accrued liabilities	5,829,474	4,114,915
Preferred noncontrolling interests dividends payable	193,069	195,411
Short term debt	630,478	5,664,827
Current portion of long-term debt	3,146,727	7,919,179
Other current liabilities	3,553,701	4,391,587
Current liabilities from discontinued operations	1,249,217	5,620,697
Total current liabilities	24,891,475	39,555,603
Long-term debt, net of current portion	25,511,099	10,031,732
Other liabilities	15,215,544	12,255,809
Other liabilities from discontinued operations		9,969
Total liabilities	65,618,118	61,853,113
Preferred noncontrolling interest	8,700,000	8,700,000
Commitments and contingencies (Note 9)
Foundation Healthcare shareholders’ deficit:
Preferred stock $0.0001 par value, 10,000,000 authorized; no shares issued and outstanding
Common stock $0.0001 par value, 500,000,000 shares authorized; 171,323,381 and 163,834,886 issued and outstanding, respectively	17,132	16,383
Paid-in capital	18,939,344	18,241,756
Accumulated deficit	(38,573,934)	(35,171,315)
Total Foundation Healthcare shareholders’ deficit	(19,617,458)	(16,913,176)
Noncontrolling interests	836,336	1,634,892
Total deficit	(18,781,122)	(15,278,284)
Total liabilities, preferred noncontrolling interest and shareholders’ deficit	$ 55,536,996	$ 55,274,829

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Preferred Noncontrolling Interests - Additional Information (Detail) (USD $)	1 Months Ended	6 Months Ended	12 Months Ended
	Oct. 31, 2013	Jun. 30, 2014	Dec. 31, 2013
Minority Interest [Line Items]
Common stock value		$ 17,132	$ 16,383
Total consideration			9,135,000
Amount of unreturned capital contribution and undistributed preferred distributions		10,000
Conversion price per share		$ 2.00
Common Stock
Minority Interest [Line Items]
Total consideration			435,000
Number of shares sold			870,000
Foundation Health Enterprises Llc
Minority Interest [Line Items]
Offering cost	100,000		100,000
Common stock issued	10,000		10,000
Common stock value	5,000		5,000
Total consideration			8,700,000
Cumulative preferred annual return		9.00%
Foundation Health Enterprises Llc | Class B member interests
Minority Interest [Line Items]
Offering cost	105,000		105,000
Number offering units			87
Foundation Health Enterprises Llc | Private placement
Minority Interest [Line Items]
Offering cost	$ 9,135,000		$ 9,135,000

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Nature of Business

6 Months Ended

Jun. 30, 2014

Nature of Business

Note 1 – Nature of Business

Foundation Healthcare, Inc. (the “Company”) is organized under the laws of the state of Oklahoma and owns controlling and noncontrolling interests in surgical hospitals located in Texas. The Company also owns noncontrolling interests in ambulatory surgery centers (“ASCs”) located in Texas, Oklahoma, Pennsylvania, New Jersey, Maryland and Ohio. Additionally, the Company provides sleep testing management services to various rural hospitals in Iowa, Minnesota, Missouri, Nebraska and South Dakota under management contracts with the hospitals. The Company provides management services to a majority of the facilities that it has noncontrolling interests (referred to as “Affiliates”) under the terms of various management agreements.

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Changes in Carrying Amount of Goodwill (Detail) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Goodwill [Line Items]
Goodwill Gross Amount	$ 23,019,309	$ 23,019,309
Goodwill Accumulated Impairment Loss	(22,045,382)	(22,045,382)
Goodwill	$ 973,927	$ 973,927

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Discontinued Operations (Tables)

6 Months Ended

Jun. 30, 2014

Activity in Acquired Accruals for Restructuring Charges Established for Lease Termination Costs

For the six month period ended June 30, 2014, the activity in the acquired accruals for restructuring charges established for lease termination costs were as follows:

	Lease Termination Cost
Balance at December 31, 2013	$	78,235
Adjustments		139,940
Cash Payments		(20,575	)
Balance at June 30, 2014	$	197,600

Operating Results and Balance Sheet Items of Discontinued Operations

The operating results of the discontinued sleep diagnostic and therapy locations and the Company’s other discontinued operations for the six month period ended June 30, 2014 are summarized below:

	2014
Revenue	$	123,728
Net loss before taxes		(692,462	)
Income tax benefit		191,424
Net loss from discontinued operations, net of tax	$	(501,038	)

The balance sheet items for discontinued operations are summarized below:

	June 30, 2014		December 31, 2013
Cash and cash equivalents	$	—	$	49,252
Accounts receivable, net of allowances		—		222,943
Inventories		—		1,893
Other current assets		165,030		244,541
Total current assets		165,030		518,629
Fixed assets, net		300,529		426,228
Other assets		150,000		150,000
Total non-current assets		450,529		576,228
Total assets	$	615,559	$	1,094,857
Payables and accrued liabilities	$	1,249,217	$	1,557,771
Short-term debt		—		3,994,932
Current portion of long-term debt		—		67,994
Total current liabilities		1,249,217		5,620,697
Long-term debt, net of current portion		—		9,969
Total liabilities	$	1,249,217	$	5,630,666

Schedule of Borrowings and Capital Lease Obligations

The Company’s borrowings and capital lease obligations included in discontinued operations are as follows:

	June 30, 2014		December 31, 2013
Short-term Debt
Arvest bank	$	—	$	3,994,932
Long-term Debt
Sleep center notes payable		—		28,723
Equipment capital leases		—		49,389
Total		—		78,112
Less: Current portion of long term debt		—		(68,143	)
Long-term debt	$	—	$	9,969

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Goodwill and Other Intangibles - Additional Information (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Goodwill [Line Items]
Reverse acquisition			$ 21,900,000
Amortization expense	$ 513,868	$ 446,218	$ 1,027,735	$ 896,960

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Borrowings and Capital Lease Obligations (Tables)

6 Months Ended

Jun. 30, 2014

Schedule of Short-Term Debt Obligations

The Company’s short-term debt obligations are as follows:

	Rate (1)		June 30, 2014		December 31, 2013
Note payable - Legacy			$	—	$	2,814,027
Note payable - S&H leasing				—		1,865,600
Note payable - working capital				—		800,000
Insurance premium financings	3.9 - 4.8%			583,663		101,135
Note payable - Medicare cost report		10.1%		46,815		84,065
Short-term debt			$	630,478	$	5,664,827

(1) Effective rate as of June 30, 2014

Schedule of Borrowings and Capital Lease Obligations

The Company’s borrowings and capital lease obligations included in discontinued operations are as follows:

	June 30, 2014		December 31, 2013
Short-term Debt
Arvest bank	$	—	$	3,994,932
Long-term Debt
Sleep center notes payable		—		28,723
Equipment capital leases		—		49,389
Total		—		78,112
Less: Current portion of long term debt		—		(68,143	)
Long-term debt	$	—	$	9,969

Schedule of Applicable Margins Rate

The Applicable Margins are as follows:

	Applicable Margin
Senior Debt Ratio	Revolving Loan	Term Loan
≥ 2.5x	3.75%	4.25%
< 2.5x, but ≥ 2.0x	3.25%	3.75%
< 2.0 x	2.75%	3.25%

Schedule of Future Maturities of Long-Term Debt

At June 30, 2014, future maturities of long-term debt were as follows:

Twelve months ended June 30:
2015	$	3,146,727
2016		4,226,915
2017		4,209,171
2018		4,052,562
2019		4,022,451
Thereafter		9,000,000

Continuing Operations

Schedule of Borrowings and Capital Lease Obligations

The Company’s long-term debt and capital lease obligations are as follows:

	Rate (1)			Maturity Date	June 30, 2014			December 31, 2013
Senior Lender:
Note payable			4.4%	Jul. 2021	$	27,500,000		$	—
Other Lenders:
Line of credit						—			896,000
Notes payable - working capital						—			3,715,088
Note payable - equity investments						—			3,270,427
Note payable - management agreements						—			640,466
Note payable - assumption						—			146,857
Note payable - preferred interest redemption						—			5,100,000
Note payable - settlements		5.25 - 5.75%		Apr. 2016 - Jan. 2018		232,787			1,189,725
Note payable - THE		4.6 - 8.0%		Jan. 2015 - Feb. 2016		233,252			311,149
Notes payable - physician partners						—			103,604
Notes payable - acquisition			6.0%	Dec. 2014 - Oct. 2015		78,355			99,610
Capital Lease Obligations			5.5 - 9.1%			613,432			2,477,985
Total						28,657,826			17,950,911
Less: Current portion of long-term debt						(3,146,727	)		(7,919,179	)
Long-term debt					$	25,511,099		$	10,031,732

(1) Effective rate as of June 30, 2014

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Basis of Presentation

6 Months Ended

Jun. 30, 2014

Basis of Presentation

Note 2 – Basis of Presentation

Reverse Acquisition – On July 22, 2013, the Company acquired Foundation Surgery Affiliates, LLC (“FSA”) and FSA’s consolidated variable interest entity, Foundation Surgical Hospital Affiliates, LLC (“FSHA”) (collectively referred to as “Foundation”). 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 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.

Going Concern and Management’s Plan – As of June 30, 2014, the Company had an accumulated deficit of $38.6 million, cash and cash equivalents of $1.9 and working capital of $2.1 million. During the six months ended June 30, 2014, the Company generated a net loss attributable to Foundation Healthcare of $3.0 million and used $2.3 million in cash flow from operating activities from continuing operations. On June 30, 2014, the Company completed a refinancing of substantially all of its outstanding indebtedness through the execution of the SNB Credit Facility. The SNB Credit Facility includes a Term Loan in the amount of $27.5 million and a Revolving Loan in the amount of $2.5 million (see Note 7 – Borrowings and Capital Lease Obligations).

As of June 30, 2014, the Company has $2.5 million available under the Revolving Loan. Management believes that the line of credit along with the Company’s cash on hand and projected cash flow from operations will provide the Company with enough liquidity to meet its cash requirements over the next 12 months. However, if the Company’s cash flows from operations do not meet or exceed management’s projections, the Company may need to raise additional funds through debt or equity financings. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Accounts receivable, allowances for doubtful accounts	$ 2,262,790	$ 4,778,915
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	500,000,000	500,000,000
Common stock, issued	171,323,381	163,834,886
Common stock, outstanding	171,323,381	163,834,886

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Related Party Transactions

6 Months Ended

Jun. 30, 2014

Related Party Transactions

Note 12 – Related Party Transactions

Effective June 1, 2014, the Company’s hospital subsidiary located in El Paso, Texas entered into a sublease agreement with The New Sleep Lab International, Ltd., referred to as New Sleep. New Sleep is controlled by Dr. Robert Moreno, one of our Directors. The sublease with New Sleep calls for monthly rent payments of $8,767 and the sublease expires on November 30, 2018. The space subleased from New Sleep will be sublet to physician partners and casual uses of our hospital and is located in a building that also houses one of our imaging facilities. During the six months ended June 30, 2014, the Company incurred approximately $8,767 in lease expense under the terms of the lease.

As of June 30, 2014, the Company had $0.9 million on deposit at Valliance Bank. Valliance Bank is controlled by Mr. Roy T. Oliver, one of our greater than 5% shareholders and affiliates. In addition, the Company was obligated to Valliance Bank under certain notes payable totaling $5.9 million at December 31, 2013. On June 30, 2014, the notes were paid in full from the proceeds of the SNB Credit facility.  The interest rates on the notes ranged from 5% to 10%. A non-controlling interest in Valliance Bank is held by Mr. Joseph Harroz, Jr., a director of the Company. Mr. Stanton Nelson, the Company’s Chief Executive Officer and Mr. Harroz also serve as directors of Valliance Bank.

In October 2013, the Company completed a private placement offering $9,135,000 (see Note 8 – Preferred Noncontrolling Interests for additional information). The offering was comprised of 87 FHE Units. Each FHE Unit was offered at $105,000 and entitled 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. Mr. Stanton Nelson, the Company’s chief executive officer, purchased 5 FHE units for $525,000.

The Company occupies office space subject to a lease agreement with City Place, LLC (“City Place”). Under the lease agreement, the Company pays monthly rent of $17,970 until June 30, 2014; $0.00 from July 1, 2014 to January 31, 2015 and $17,970 from February 1, 2015 to March 31, 2017 plus additional payments for allocable basic expenses of City Place; the lease expires on March 31, 2017. A non-controlling interest in City Place is held by Roy T. Oliver, one of the Company’s greater than 5% shareholders and affiliates. During the six months ended June 30, 2014, the Company incurred approximately $47,000 in lease expense under the terms of the lease.

As of June 30, 2014 and December 31, 2013, the Company has obligations of $1.4 million that are owed to FHA and certain real estate subsidiaries and affiliates of FHA related to transactions that occurred prior to the Foundation acquisition in July 2013. The amounts owed to FHA and FHA affiliates are included in other liabilities on the accompanying consolidated balance sheets.

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%.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 13, 2014
Document And Entity Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Trading Symbol	FDNH
Entity Registrant Name	FOUNDATION HEALTHCARE, INC.
Entity Central Index Key	0001272597
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		171,323,381

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Subsequent Events

6 Months Ended

Jun. 30, 2014

Subsequent Events

Note 13 – Subsequent Events

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

During July 2014, the Company utilized approximately $0.5 million of the SNB Restricted Cash to complete the payoff of certain indebtedness that was outstanding at June 30, 2014.

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Condensed Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Net Revenues:
Patient services	$ 19,909,721	$ 18,626,077	$ 39,423,203	$ 34,486,737
Provision for doubtful accounts	(875,574)	(1,090,563)	(1,237,090)	(1,727,414)
Net patient services revenue	19,034,147	17,535,514	38,186,113	32,759,323
Management fees from affiliates	1,434,769	1,787,621	2,704,072	3,525,849
Other revenue	1,610,651	2,321,984	2,821,173	2,796,873
Revenues	22,079,567	21,645,119	43,711,358	39,082,045
Equity in earnings of affiliates	895,767	1,837,146	1,422,852	3,053,861
Operating Expenses:
Salaries and benefits	7,094,381	6,457,281	14,978,240	12,795,378
Supplies	5,693,006	5,833,285	10,634,377	10,334,225
Other operating expenses	8,925,671	8,147,336	18,154,125	15,903,357
Depreciation and amortization	1,423,384	1,229,374	2,884,301	2,346,061
Total operating expenses	23,136,442	21,667,276	46,651,043	41,379,021
Other Income (Expense):
Interest expense, net	(503,759)	(556,103)	(1,005,232)	(1,022,772)
Other income (expense)	840	(89,849)	840	3,158
Net other (expense)	(502,919)	(645,952)	(1,004,392)	(1,019,614)
Income (loss) from continuing operations, before taxes	(664,027)	1,169,037	(2,521,225)	(262,729)
Benefit for income taxes			852,005
Income (loss) from continuing operations, net of taxes	(664,027)	1,169,037	(1,669,220)	(262,729)
Loss from discontinued operations, net of tax	(188,716)		(501,038)
Net income (loss)	(852,743)	1,169,037	(2,170,258)	(262,729)
Less: Net income attributable to noncontrolling interests	461,301	211,944	846,223	(880,087)
Net income (loss) attributable to Foundation Healthcare	(1,314,044)	957,093	(3,016,481)	617,358
Preferred noncontrolling interests dividends	(193,069)	(318,331)	(386,138)	(599,207)
Net income (loss) attributable to Foundation Healthcare common stock	(1,507,113)	638,762	(3,402,619)	18,151
Earnings per common share (basic and diluted):
Net income (loss) attributable to continuing operations attributable to Foundation Healthcare common stock	$ (0.01)	$ 0.00	$ (0.02)	$ 0.00
Loss from discontinued operations, net of tax	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Basic and diluted net income (loss) per share	$ (0.01)	$ 0.00	$ (0.02)	$ 0.00
Weighted average number of common and diluted shares outstanding	171,285,897	162,523,276	169,318,636	162,523,276
Pro Forma
Other Income (Expense):
Benefit for income taxes		363,695		234,596
Net income (loss) attributable to Foundation Healthcare common stock		$ 593,398		$ (216,445)
Earnings per common share (basic and diluted):
Basic and diluted net income (loss) per share		$ 0.00		$ 0.00

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Borrowings and Capital Lease Obligations

6 Months Ended

Jun. 30, 2014

Borrowings and Capital Lease Obligations

Note 7 – Borrowings and Capital Lease Obligations

The Company’s short-term debt obligations are as follows:

	Rate (1)		June 30, 2014		December 31, 2013
Note payable - Legacy			$	—	$	2,814,027
Note payable - S&H leasing				—		1,865,600
Note payable - working capital				—		800,000
Insurance premium financings	3.9 - 4.8%			583,663		101,135
Note payable - Medicare cost report		10.1%		46,815		84,065
Short-term debt			$	630,478	$	5,664,827

(1) Effective rate as of June 30, 2014

The Company’s long-term debt and capital lease obligations are as follows:

	Rate (1)			Maturity Date	June 30, 2014			December 31, 2013
Senior Lender:
Note payable			4.4%	Jul. 2021	$	27,500,000		$	—
Other Lenders:
Line of credit						—			896,000
Notes payable - working capital						—			3,715,088
Note payable - equity investments						—			3,270,427
Note payable - management agreements						—			640,466
Note payable - assumption						—			146,857
Note payable - preferred interest redemption						—			5,100,000
Note payable - settlements		5.25 - 5.75%		Apr. 2016 - Jan. 2018		232,787			1,189,725
Note payable - THE		4.6 - 8.0%		Jan. 2015 - Feb. 2016		233,252			311,149
Notes payable - physician partners						—			103,604
Notes payable - acquisition			6.0%	Dec. 2014 - Oct. 2015		78,355			99,610
Capital Lease Obligations			5.5 - 9.1%			613,432			2,477,985
Total						28,657,826			17,950,911
Less: Current portion of long-term debt						(3,146,727	)		(7,919,179	)
Long-term debt					$	25,511,099		$	10,031,732

(1) Effective rate as of June 30, 2014

SNB Credit Facility

Effective June 30, 2014, we entered into a Loan Agreement with Bank SNB, National Association, and Texas Capital Bank, together referred to as Lenders and collectively the agreement is referred to as the SNB Credit Facility.  The SNB Credit Facility was used to consolidate substantially all of our and our subsidiaries’ debt in the principal amount of $27.5 million, which we refer to as the Term Loan, and provides for an additional revolving loan in the amount of $2.5 million, which we refer to as the Revolving Loan. As of June 30, 2014 we have not drawn funds from the Revolving Loan.  We have also entered into a number of ancillary agreements in connection with the SNB Credit Facility, including deposit account control agreements, subsidiary guarantees, security agreements and promissory notes.

Maturity Dates.  The Term Loan matures on June 30, 2021 and the Revolving Loan matures on June 30, 2016.

Interest Rates.  The interest rate for the Term Loan and Revolving Loan is 30-day LIBOR plus the Applicable Margins based on our Senior Debt Ratio, as defined.  The Applicable Margins are as follows:

	Applicable Margin
Senior Debt Ratio	Revolving Loan	Term Loan
≥ 2.5x	3.75%	4.25%
< 2.5x, but ≥ 2.0x	3.25%	3.75%
< 2.0 x	2.75%	3.25%

The Applicable Margins are established at 3.75% for the Revolving Loan and 4.25% for the Term Loan through December 31, 2014.  Subsequent to December 31, 2014, the Applicable Margins will be adjusted on a quarterly basis based on our senior debt ratio.

The Senior Debt Ratio is calculated by dividing all of our indebtedness, including capital leases, which is secured by a lien or security interest in any of our assets by our EBITDA for the preceding four fiscal quarters.  EBITDA is defined in the SNB Credit Facility as our net income calculated before interest expense, provision for income taxes, depreciation and amortization expenses, stock compensation, gains arising from the write-up of assets, extraordinary gains and any one-time expenses approved by Bank SNB.

Interest and Principal Payments.  We are required to make quarterly payments of principal and interest on the Term Loan.  The first four quarterly payments on the Term Loan will be $875,000 plus all accrued and unpaid interest.  Each subsequent quarterly payment will be $1,000,000 plus all accrued and unpaid interest.  We are required to make quarterly payments on the Revolving Loan equal to the accrued and unpaid interest.  All unpaid principal and interest on the Term Loan and Revolving Loan must be paid on the respective maturity dates of June 30, 2021 and June 30, 2016.

Permitted Acquisitions.  We must obtain the Lenders approval for any acquisition, merger or consolidation in which the consideration paid for the acquisition, merger or consolidation is in excess of $1 million or for any acquisition, merger or consolidation in which the target entity’s operating income for the preceding 12 month period is less than zero.

Mandatory Prepayments.  If we sell any assets in excess of $100,000 or collectively sell any assets in a 12 month period in excess of $100,000, we must make a prepayment equal to the net proceeds of the asset sale(s).  If we receive proceeds from a debt or equity offering that is not used for a permitted acquisition over a 12 month period following the offering or for repayment of our preferred noncontrolling interests, we must make a prepayment equal to the net proceeds of the debt or equity offering.  Subsequent to the completion of our annual audited financial statements, we must make a prepayment equal to 30% of our Excess Cash Flow which is defined as the amount of EBITDA (as defined in the SNB Credit Facility) for the fiscal year that exceeds the sum of debt service payments plus capital expenditures plus cash payments for federal, state and local income taxes, plus distributions made by our Equity Owned Hospitals to persons other than us.

Voluntary Prepayments.  We may prepay amounts under the Term Loan at any time provided that we are required to pay a prepayment penalty of 2% of the amount prepaid if payment is made prior to the first anniversary, 1.5% if the prepayment is made after the first anniversary but prior to the second anniversary and 1% if the prepayment is made after the second anniversary but prior to the maturity date.  We may prepay amounts under the Revolving Loan at any time without penalty.

Guaranties.  Each of our direct or indirect wholly-owned subsidiaries jointly and severally and unconditionally guaranty payment of our obligations owed to Lenders.

Financial Covenants:

Senior Debt Ratio.  We must maintain a Senior Debt Ratio not in excess of 3.00 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014.

Senior Debt Service Coverage Ratio.  We must maintain a Senior Debt Service Coverage Ratio of not less than 1.30 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014. The Senior Debt Service Coverage ratio is the ratio of EBITDA (as defined in the SNB Credit Facility) for the preceding four fiscal quarters minus cash payments for federal, state and local taxes, minus capital expenditures to our debt service payments for the same period.

Adjusted Senior Debt Service Coverage Ratio.  We must maintain an Adjusted Senior Debt Service Coverage Ratio of not less than 1.05 to 1.00 as of the end of each fiscal quarter beginning with the quarter ending September 30, 2014. The Adjusted Senior Debt Service Coverage Ratio is the ratio of EBITDA (as defined in the SNB Credit Facility) for the preceding four fiscal quarters minus cash payments for federal, state and local taxes, minus capital expenditures, plus distributions made to our preferred noncontrolling interest holders, plus distributions made by our Equity Owned Hospitals to persons other than us to our debt service payments for the same period.

Minimum EBITDA.  We must have EBITDA of not less than $2 million for the fiscal quarter ended on June 30, 2014. The Company’s EBITDA adjusted for certain onetime expenses, which were approved by Bank SNB, was in excess of $2 million.

Annualized EBITDA.  Until June 30, 2015 and for purposes of calculating compliance with the financial covenants in SNB Credit Facility, EBITDA shall be determined by annualizing EBITDA for the fiscal quarter ending on September 30, 2014 and each quarter that has elapsed thereafter.

Restrictions on Indebtedness.  We and our Equity Owned Hospitals are not allowed to create any indebtedness other than indebtedness for the purchase of fixed assets not exceeding $500,000 in any fiscal year, trade payables incurred in the ordinary course of business and not past due, contingent obligations and unsecured indebtedness not exceeding $100,000 in the aggregate at any time outstanding.

Use of Proceeds.  All proceeds of the Term Loan were used solely for the refinancing of existing indebtedness.  The proceeds of the Revolving Loan will be used for working capital.

Collateral.  Payment and performance of our obligations under the SNB Credit Facility are secured in general by all of our assets.

Defaults and Remedies.  In addition to the general defaults of failure to perform our obligations under the Loan Agreement, events of default also include the occurrence of a change in control, as defined, and the loss of our Medicare or Medicaid certification, collateral casualties, entry of a judgment of $150,000 or more, failure of first liens on collateral and the termination of any of our management agreements that represent more than 10% of our management fees for the preceding 18 month period.  In the event of a monetary default, all of our obligations due under the SNB Credit Facility shall become immediately due and payable.  In the event of a non-monetary default, we have 10 days or in some cases three days to cure before Bank SNB has the right to declare our obligations due under the SNB Credit Facility immediately due and payable.

At June 30, 2014, future maturities of long-term debt were as follows:

Twelve months ended June 30:
2015	$	3,146,727
2016		4,226,915
2017		4,209,171
2018		4,052,562
2019		4,022,451
Thereafter		9,000,000

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Goodwill and Other Intangibles

6 Months Ended

Jun. 30, 2014

Goodwill and Other Intangibles

Note 6 – Goodwill and Other Intangibles

Changes in the carrying amount of goodwill are as follows:

	Gross Amount		Accumulated Impairment Loss			Net Carrying Value
December 31, 2013	$	23,019,309	$	(22,045,382	)	$	973,927
June 30, 2014	$	23,019,309	$	(22,045,382	)	$	973,927

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

The goodwill associated with the reverse acquisition was $21.9 million. The Company then determined the projected cash flows from the continuing operations of the legacy Graymark business were not sufficient to support the recorded goodwill. The Company evaluated the fair value of the goodwill subsequent to the reverse acquisition and determined the acquired goodwill was fully-impaired.

Changes in the carrying amount of intangible assets during the six months ended June 30, 2014 were as follows:

	Carrying		Accumulated
	Amount		Amortization			Net
December 31, 2013	$	14,524,500	$	(3,385,879	)	$	11,138,621
Amortization		—		(1,027,735	)		(1,027,735	)
June 30, 2014	$	14,524,500	$	(4,413,614	)	$	10,110,886

Intangible assets as of June 30, 2014 and December 31, 2013 include the following:

		June 30, 2014							December 31,
	Useful	Carrying		Accumulated					2013
	Life (Years)	Value		Amortization			Net		Net
Management fee contracts	6 - 8	$	3,498,500	$	(1,952,472	)	$	1,546,028	$	1,763,463
Non-compete	5		2,027,000		(646,444	)		1,380,556		1,583,256
Physician memberships	7		6,468,000		(1,540,000	)		4,928,000		5,390,000
Trade Name	5		381,000		(71,882	)		309,118		347,218
Service Contracts	10		2,150,000		(202,816	)		1,947,184		2,054,684
		$	14,524,500	$	(4,413,614	)	$	10,110,886	$	11,138,621

Amortization expense for the three months ended June 30, 2014 and 2013 was $513,868 and $446,218 respectively. Amortization expense for the six months ended June 30, 2014 and 2013 was $1,027,735 and $896,960 respectively. Amortization expense for the next five years related to these intangible assets is expected to be as follows:

Twelve months ended June 30,
2015	$	2,055,474
2016		2,055,474
2017		2,055,474
2018		1,618,673
2019		1,145,607
Thereafter		1,180,184

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Goodwill and Other Intangibles (Tables)

6 Months Ended

Jun. 30, 2014

Changes in Carrying Amount of Goodwill

Changes in the carrying amount of goodwill are as follows:

	Gross Amount		Accumulated Impairment Loss			Net Carrying Value
December 31, 2013	$	23,019,309	$	(22,045,382	)	$	973,927
June 30, 2014	$	23,019,309	$	(22,045,382	)	$	973,927

Changes in Carrying Amount of Intangible Assets

Changes in the carrying amount of intangible assets during the six months ended June 30, 2014 were as follows:

	Carrying		Accumulated
	Amount		Amortization			Net
December 31, 2013	$	14,524,500	$	(3,385,879	)	$	11,138,621
Amortization		—		(1,027,735	)		(1,027,735	)
June 30, 2014	$	14,524,500	$	(4,413,614	)	$	10,110,886

Intangible Assets

Intangible assets as of June 30, 2014 and December 31, 2013 include the following:

		June 30, 2014							December 31,
	Useful	Carrying		Accumulated					2013
	Life (Years)	Value		Amortization			Net		Net
Management fee contracts	6 - 8	$	3,498,500	$	(1,952,472	)	$	1,546,028	$	1,763,463
Non-compete	5		2,027,000		(646,444	)		1,380,556		1,583,256
Physician memberships	7		6,468,000		(1,540,000	)		4,928,000		5,390,000
Trade Name	5		381,000		(71,882	)		309,118		347,218
Service Contracts	10		2,150,000		(202,816	)		1,947,184		2,054,684
		$	14,524,500	$	(4,413,614	)	$	10,110,886	$	11,138,621

Amortization Expense for Next Five Years Related to Intangible Assets

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

Twelve months ended June 30,
2015	$	2,055,474
2016		2,055,474
2017		2,055,474
2018		1,618,673
2019		1,145,607
Thereafter		1,180,184

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Interim Financial Information

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 three months and six months ended June 30, 2014 are not necessarily indicative of results that may be expected for the year ended December 31, 2014. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2013. The December 31, 2013 consolidated balance sheet was derived from audited financial statements.

Pro forma income information

Pro forma income information – Prior to July 22, 2013, FSA’s and FSHA’s member had elected to have FSA’s and FSHA’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 tax returns and no provision for income taxes is included in the Company’s consolidated financial statements for periods prior to July 22, 2013. The pro forma income information provides an adjustment for income tax expense as if FSA and FSHA had been a C Corporation prior to July 22, 2013 at an assumed combined federal and state effective tax rate of 38%, which approximates the calculated statutory tax rates for the periods.

Consolidation

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

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 shares 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

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

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.

Contractual Discounts and Cost Report Settlements

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, Medicaid and Tricare 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. The estimated net cost report settlements due to the Company were $521,555 and $235,000 as of June 30, 2014 and December 31, 2013 respectively, and are included in prepaid and other current assets in the accompanying consolidated balance sheets. We adjusted our cost report estimate by $286,555 during the six months ended June 30, 2014 based on our final filed cost report for 2013 and an estimate of the 2014 cost report.  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

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.

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. During the Company’s normal quarterly review process at March 31, 2014, management determined that a portion of the accounts receivable related to personal injury cases at our FSH SA location had grown to a level requiring it to be analyzed as a distinct payor category. Based on the historical cash collection experience and other analytical measures as noted above, the allowance for doubtful accounts related to the personal injury cases was lowered by $1.0 million.

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 allowance for doubtful accounts for the six months ending June 30, 2014 follows:

	2014
Balance at beginning of period	$	4,778,915
Provisions recognized as reduction in revenues		1,237,090
Write-offs, net of recoveries		(3,753,215	)
Balance at end of period	$	2,262,790

Cash and cash equivalents

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.

Restricted Cash

Restricted Cash – As of June 30, 2014 and December 31, 2013, the Company had restricted cash of approximately $3.4 million and $0.7 million respectively, included in prepaid and other current assets in the accompanying consolidated balance sheets.  The restricted cash at June 30, 2014 is related to the SNB Credit Facility (see Note 7 – Borrowings and Capital Lease Obligations) and represents the proceeds from the Term Loan that were not utilized as of June 30, 2014 to retire existing debt (“SNB Restricted Cash”).  The SNB Restricted Cash can be utilized to complete the payoff of the remaining indebtedness of the Company and to pay federal and state income taxes.  Use of the SNB Restricted Cash must be approved by Bank SNB.  The restricted cash at December 31, 2013 was pledged as collateral against debt that was paid-off from the proceeds of the SNB Credit Facility.

Goodwill and Intangible Assets

Goodwill and Intangible Assets – 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 will complete its annual impairment test in December 2014.

Intangible assets other than goodwill which include physician membership interests, service contracts and covenants not to compete are amortized over their estimated useful lives using the straight line method. The remaining lives range from five to ten 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.

Net income (loss) per share

Net income (loss) per share – Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an anti-dilutive effect on diluted loss per share are excluded from the calculation.

Recently Adopted and Recently Issued Accounting Guidance

Recently Adopted and Recently Issued Accounting Guidance

Adopted Guidance

In February 2013, the FASB issued changes to the accounting for obligations resulting from joint and several liability arrangements. These changes require an entity to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of (i) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and (ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. An entity will also be required to disclose the nature and amount of the obligation as well as other information about those obligations. Examples of obligations subject to these requirements are debt arrangements and settled litigation and judicial rulings. These changes become effective for the Company on January 1, 2014. Management has determined that the adoption of these changes did not have an impact on the Company’s consolidated financial statements, as the Company does not currently have any such arrangements.

In July 2013, the FASB issued changes to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Previously, there was diversity in practice as no explicit guidance existed. These changes become effective for the Company on January 1, 2014. Management has determined that the adoption of these changes did not have a significant impact on the Company’s consolidated financial statements.

Issued Guidance

In April 2014, the FASB issued changes to the reporting of discontinued operations and disclosures of disposals of components of an entity. The amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The amendments are effective prospectively for all disposals (or classifications as held for sale) of components of an entity, and for all businesses that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. These changes become effective for the Company on January 1, 2017. Management is currently evaluating the potential impact of these changes on the Company’s consolidated financial statements.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2014

Fair Value Measurements

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.

· 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 June 30, 2014, the fair value of the Company’s long-term debt, including the current portion was determined to be approximately equal to its carrying value.

Nonrecurring Fair Value Measurements: During the six months ended June 30, 2014, the Company did not have any assets or liabilities recorded using nonrecurring fair value measurements.

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Preferred Noncontrolling Interests

6 Months Ended

Jun. 30, 2014

Preferred Stock [Text Block]

Note 8 – Preferred Noncontrolling Interests

During 2013, the Company’s wholly-owned subsidiary, Foundation Health Enterprises, LLC (“FHE”) completed a private placement offering of $9,135,000. The offering was comprised of 87 units (“FHE Unit” or “preferred noncontrolling interest”). Each FHE Unit was offered at $105,000 and entitled 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. The total consideration of $9,135,000 was comprised of $8,700,000 attributable to the preferred noncontrolling interest and $435,000 attributable to the 870,000 shares of the Company’s common stock.

The FHE Units provide for a cumulative preferred annual return of 9% on the amount allocated to the Class B membership interests. 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. Since the FHE Units have a redemption feature and a conversion feature which the Company determined to be substantive, the preferred noncontrolling interests 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.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies

Note 9 – Commitments and Contingencies

Legal claims – 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 during the six months ended June 30, 2014 and 2013 related to the Company’s ongoing unasserted legal claims.

Self-insurance – Effective January 1, 2014, the Company began using a combination of insurance and self-insurance for employee-related healthcare benefits. The self-insurance liability is determined actuarially, based on the actual claims filed and an estimate of incurred but not reported claims. Self-insurance reserves as of June 30, 2014 were $484,764 and are included in accrued liabilities in the accompanying consolidated balance sheets.

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Real Estate Transaction

6 Months Ended

Jun. 30, 2014

Real Estate Transaction

Note 11 – Real Estate Transaction

On March 1, 2014, the Company executed a 15 year master lease on the building occupied by the Company’s hospital subsidiary in San Antonio, Texas for an annual rent of $2.3 million with annual escalations of 3%. The current lease income on the underlying sub-lease is approximately $2.1 million per year which includes the rent paid by FBH SA. The master lease is an operating lease. In conjunction with the master lease and certain other agreements with the landlord, the Company received $4.1 million at the time of the lease. Given the disparity between the annual rent expense under the master lease and the rental income of the underlying sub-lease, the cash received at the execution of the lease was deferred and will be recorded on a straight-line basis as a reduction in the rent expense under the master lease.

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Schedule of Borrowings and Capital Lease Obligations (Detail) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Debt Instrument [Line Items]
Short-term Debt	$ 630,478	$ 5,664,827
Long term debt	28,657,826	17,950,911
Less: Current portion of long term debt	(3,146,727)	(7,919,179)
Long-term debt	25,511,099	10,031,732
Discontinued Operations
Debt Instrument [Line Items]
Long term debt		78,112
Less: Current portion of long term debt		(68,143)
Long-term debt		9,969
Discontinued Operations | Arvest bank
Debt Instrument [Line Items]
Short-term Debt		3,994,932
Discontinued Operations | Sleep center notes payable
Debt Instrument [Line Items]
Long term debt		28,723
Discontinued Operations | Equipment capital leases
Debt Instrument [Line Items]
Long term debt		$ 49,389

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Reverse Acquisition (Tables)

6 Months Ended

Jun. 30, 2014

Final Purchase Allocation for Reverse Acquisition

The final purchase allocation for the reverse acquisition is presented in the table below:

	Graymark
Assets acquired
Cash and cash equivalents	$	68,170
Accounts receivable		249,333
Current assets from discontinued operations		1,360,143
Other current assets		198,976
Total current assets		1,876,622
Property and equipment		1,389,169
Intangible assets		2,733,000
Goodwill		21,864,781
Other assets		252,528
Other assets from discontinued operations		1,224,140
Total assets acquired	$	29,340,240
Liabilities assumed
Accounts payable and accrued liabilities	$	2,899,823
Short term debt		2,000,000
Current portion of long term debt		714,711
Current liabilities from discontinued operations		7,375,521
Total current liabilities		12,990,055
Long term debt		742,385
Other liabilities		305,969
Other liabilities from discontinued operations		1,362,957
Total liabilities assumed		15,401,366
Net assets acquired	$	13,938,874

Acquisition Revenue and Earnings of Combined Entity Reverse Acquisition

The amounts of acquisition revenues and earnings included in the Company’s consolidated statements of operations for the six months ended June 30, 2014, and the revenue and earnings of the combined entity had the reverse acquisition date for Graymark been January 1, 2013 are as follows:

									Attributable to Foundation
	Revenue		Loss From Continuing Operations			Net Loss			Net Loss			Net Loss Per Share
Actual:
From 1/1/2014 to 6/30/2014	$	1,036,089	$	(2,633,975	)	$	(2,909,171	)	$	(2,909,171	)	$	(0.02	)
Supplemental Pro Forma:
From 1/1/2013 to 6/30/2013	$	44,993,767	$	(5,959,633	)	$	(4,606,396	)	$	(3,594,748	)	$	(0.21	)

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Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)	0 Months Ended	3 Months Ended	6 Months Ended
	Jul. 22, 2013	Mar. 31, 2014	Jun. 30, 2014	Jun. 30, 2014 Minimum	Jun. 30, 2014 Maximum	Jun. 30, 2014 Prepaid and Other Current Assets	Dec. 31, 2013 Prepaid and Other Current Assets	Jun. 30, 2014 Prepaid and Other Current Assets SNB Credit Facility
Summary Of Significant Accounting Policies [Line Items]
Federal and state effective tax rate	38.00%
Adjustments for cost report settlements			$ 286,555
Cost settlements adjustment amount						521,555	235,000
Decrease in allowance for doubtful accounts related to personal injury cases		1,000,000
Restricted Cash							$ 700,000	$ 3,400,000
Estimated useful lives				5 years	10 years

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Subsequent Events - Additional Information (Detail) (Subsequent event, USD $) In Millions, unless otherwise specified	1 Months Ended
	Jul. 31, 2014
Subsequent event
Subsequent Event [Line Items]
SNB restricted cash utilized to payoff of certain indebtedness	$ 0.5

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Schedule of Long-Term Debt and Capital Lease Obligations (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014		Dec. 31, 2013
Long Term Debt [Line Items]
Long-term debt	$ 28,657,826		$ 17,950,911
Current portion of long-term debt	3,146,727		7,919,179
Long-term debt	25,511,099		10,031,732
Capital lease obligations
Long Term Debt [Line Items]
Debt instrument, effective interest rate, minimum	5.50%	[1]
Debt instrument, effective interest rate, maximum	9.10%	[1]
Long-term debt	613,432		2,477,985
Senior Lenders | Note Payable
Long Term Debt [Line Items]
Debt instrument, effective interest rate	4.40%	[1]
Debt instrument maturity date	2021-07
Long-term debt	27,500,000
Other Lenders | Notes payable - settlements
Long Term Debt [Line Items]
Debt instrument, effective interest rate, minimum	5.25%	[1]
Debt instrument, effective interest rate, maximum	5.75%	[1]
Long-term debt	232,787		1,189,725
Other Lenders | Notes payable - settlements | Minimum
Long Term Debt [Line Items]
Debt instrument maturity date	2016-04
Other Lenders | Notes payable - settlements | Maximum
Long Term Debt [Line Items]
Debt instrument maturity date	2018-01
Other Lenders | Notes payable - THE
Long Term Debt [Line Items]
Debt instrument, effective interest rate, minimum	4.60%	[1]
Debt instrument, effective interest rate, maximum	8.00%	[1]
Long-term debt	233,252		311,149
Other Lenders | Notes payable - THE | Minimum
Long Term Debt [Line Items]
Debt instrument maturity date	2015-01
Other Lenders | Notes payable - THE | Maximum
Long Term Debt [Line Items]
Debt instrument maturity date	2016-02
Other Lenders | Notes payable - acquisition
Long Term Debt [Line Items]
Debt instrument, effective interest rate	6.00%	[1]
Long-term debt	78,355		99,610
Other Lenders | Notes payable - acquisition | Minimum
Long Term Debt [Line Items]
Debt instrument maturity date	2014-12
Other Lenders | Notes payable - acquisition | Maximum
Long Term Debt [Line Items]
Debt instrument maturity date	2015-10
Other Lenders | Line of credit
Long Term Debt [Line Items]
Long-term debt			896,000
Other Lenders | Note payable - working capital
Long Term Debt [Line Items]
Long-term debt			3,715,088
Other Lenders | Note payable - equity investments
Long Term Debt [Line Items]
Long-term debt			3,270,427
Other Lenders | Note payable - management agreements
Long Term Debt [Line Items]
Long-term debt			640,466
Other Lenders | Note payable - assumption
Long Term Debt [Line Items]
Long-term debt			146,857
Other Lenders | Note Payable Preferred Interest Redemption
Long Term Debt [Line Items]
Long-term debt			5,100,000
Other Lenders | Notes payable - physician partners
Long Term Debt [Line Items]
Long-term debt			$ 103,604

[1] Effective rate as of June 30, 2014

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Operating activities:
Net income (loss)	$ (2,170,258)	$ (262,729)
Less: Loss from discontinued operations, net of tax	(501,038)
Income from continuing operations	(1,669,220)	(262,729)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	2,884,301	2,346,061
Stock-based compensation, net of cashless vesting	698,337
Provision for doubtful accounts	1,237,090	1,727,414
Equity in earnings of affiliates	(1,422,852)	(3,053,861)
Changes in assets and liabilities -
Accounts receivable, net of provision for doubtful accounts	(1,526,452)	(4,430,322)
Receivables from affiliates	(90,536)	(763,329)
Supplies Inventories	24,179	(39,940)
Prepaid and other current assets	(4,735,515)	(387,398)
Other assets	(201,676)
Accounts payable	(1,360,178)	(67,654)
Accrued liabilities	1,714,559	3,435,092
Other current liabilities	(837,886)
Other liabilities	2,959,735	23,272
Net cash (used in) operating activities from continuing operations	(2,326,114)	(1,473,394)
Net cash (used in) operating activities from discontinued operations	(330,293)
Net cash (used in) operating activities	(2,656,407)	(1,473,394)
Investing activities:
Purchase of property and equipment	(563,436)	(2,897,420)
Distributions from affiliates	1,317,026	3,011,245
Net cash provided by (used in) investing activities from continuing operations	753,590	113,825
Net cash provided by investing activities from discontinued operations
Net cash provided by (used in) investing activities	753,590	113,825
Financing activities:
Debt proceeds	28,468,812	4,575,738
Debt payments	(22,796,246)	(2,976,299)
Preferred noncontrolling interests dividend	(388,481)	(776,644)
Distributions to noncontrolling interests	(1,644,779)	(37,446)
Distributions to member		(747,680)
Net cash provided by financing activities from continuing operations	3,639,306	37,669
Net cash (used in) financing activities from discontinued operations	(4,072,896)
Net cash provided by (used in) financing activities	(433,590)	37,669
Net change in cash and cash equivalents	(2,336,407)	(1,321,900)
Cash and cash equivalents at beginning of period	4,212,076	3,037,067
Cash and cash equivalents at end of period	1,875,669	1,715,167
Cash Paid for Interest and Income Taxes:
Interest expense	1,162,072	957,230
Interest expense, discontinued operations	168,733
Income taxes, continuing operations	$ 1,950,000

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Discontinued Operations

6 Months Ended

Jun. 30, 2014

Discontinued Operations

Note 5 – Discontinued Operations

Prior to the reverse acquisition, Graymark committed to a plan to divest of or close certain sleep diagnostic and sleep therapy locations. The decision was based on a combination of the financial performance of the facilities and the shift in focus to the business model of Foundation. As a result of the pending closure or sale of these locations, the related assets, liabilities, results of operations and cash flows were classified as discontinued operations which were acquired by the Company in the reverse acquisition.

Under the plan, from July 2013 to October 2013, the Company closed or sold 24 sleep diagnostic locations including both IDTF and contracted locations in Georgia, Iowa, Kansas, Missouri, Nevada, Oklahoma and Texas and 5 sleep therapy locations in Iowa, Kansas, Nevada, Oklahoma and Texas.

As part of the reverse acquisition, the Company acquired the special charge liability of $475,570 related to the estimated closing costs resulting from the plan to sell or close the sleep diagnostic and therapy locations. For the six month period ended June 30, 2014, the activity in the acquired accruals for restructuring charges established for lease termination costs were as follows:

	Lease Termination Cost
Balance at December 31, 2013	$	78,235
Adjustments		139,940
Cash Payments		(20,575	)
Balance at June 30, 2014	$	197,600

Adjustments to the special charge liability include changes to estimated settlements or other changes to the liabilities. Additional charges or adjustments may be recorded in future periods dependent upon the Company’s ability to sub-lease or otherwise mitigate future lease costs at closed facilities.

The operating results of the discontinued sleep diagnostic and therapy locations and the Company’s other discontinued operations for the six month period ended June 30, 2014 are summarized below:

	2014
Revenue	$	123,728
Net loss before taxes		(692,462	)
Income tax benefit		191,424
Net loss from discontinued operations, net of tax	$	(501,038	)

The balance sheet items for discontinued operations are summarized below:

	June 30, 2014		December 31, 2013
Cash and cash equivalents	$	—	$	49,252
Accounts receivable, net of allowances		—		222,943
Inventories		—		1,893
Other current assets		165,030		244,541
Total current assets		165,030		518,629
Fixed assets, net		300,529		426,228
Other assets		150,000		150,000
Total non-current assets		450,529		576,228
Total assets	$	615,559	$	1,094,857
Payables and accrued liabilities	$	1,249,217	$	1,557,771
Short-term debt		—		3,994,932
Current portion of long-term debt		—		67,994
Total current liabilities		1,249,217		5,620,697
Long-term debt, net of current portion		—		9,969
Total liabilities	$	1,249,217	$	5,630,666

The Company’s borrowings and capital lease obligations included in discontinued operations are as follows:

	June 30, 2014		December 31, 2013
Short-term Debt
Arvest bank	$	—	$	3,994,932
Long-term Debt
Sleep center notes payable		—		28,723
Equipment capital leases		—		49,389
Total		—		78,112
Less: Current portion of long term debt		—		(68,143	)
Long-term debt	$	—	$	9,969

On June 30, 2014, the Company completed a refinancing of substantially all its outstanding indebtedness through the execution of the SNB Credit Facility.  The SNB Credit Facility includes a Term Loan in the amount of $27.5 million and a Revolving Loan in the amount of $2.5 million (see Note 7 – Borrowings and Capital Lease Obligations).  A portion of the proceeds from the Term Loan were used to refinance the full amount of the Company’s indebtedness previously included in discontinued operations.

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Allowance for Doubtful Accounts (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014
Allowance for Doubtful Accounts Receivable [Roll Forward]
Balance at beginning of period	$ 4,778,915
Provisions recognized as reduction in revenues	1,237,090
Write-offs, net of recoveries	(3,753,215)
Balance at end of period	$ 2,262,790

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Intangible Assets (Detail) (USD $)	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Finite Lived Intangible Assets [Line Items]
Carrying Value	$ 14,524,500	$ 14,524,500
Accumulated Amortization	(4,413,614)	(3,385,879)
Intangible assets, net	10,110,886	11,138,621
Minimum
Finite Lived Intangible Assets [Line Items]
Useful Life	5 years
Maximum
Finite Lived Intangible Assets [Line Items]
Useful Life	10 years
Management fee contracts
Finite Lived Intangible Assets [Line Items]
Carrying Value	3,498,500
Accumulated Amortization	(1,952,472)
Intangible assets, net	1,546,028	1,763,463
Management fee contracts | Minimum
Finite Lived Intangible Assets [Line Items]
Useful Life	6 years
Management fee contracts | Maximum
Finite Lived Intangible Assets [Line Items]
Useful Life	8 years
Non-compete
Finite Lived Intangible Assets [Line Items]
Useful Life	5 years
Carrying Value	2,027,000
Accumulated Amortization	(646,444)
Intangible assets, net	1,380,556	1,583,256
Physician memberships
Finite Lived Intangible Assets [Line Items]
Useful Life	7 years
Carrying Value	6,468,000
Accumulated Amortization	(1,540,000)
Intangible assets, net	4,928,000	5,390,000
Trade Name
Finite Lived Intangible Assets [Line Items]
Useful Life	5 years
Carrying Value	381,000
Accumulated Amortization	(71,882)
Intangible assets, net	309,118	347,218
Service Contracts
Finite Lived Intangible Assets [Line Items]
Useful Life	10 years
Carrying Value	2,150,000
Accumulated Amortization	(202,816)
Intangible assets, net	$ 1,947,184	$ 2,054,684

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2014

Allowance for Doubtful Accounts

The activity in the allowance for doubtful accounts for the six months ending June 30, 2014 follows:

	2014
Balance at beginning of period	$	4,778,915
Provisions recognized as reduction in revenues		1,237,090
Write-offs, net of recoveries		(3,753,215	)
Balance at end of period	$	2,262,790