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.