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 11,450,000 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 consolidated financial statements for the periods prior to July 22, 2013 represent those of FSA. The historical financial statements of FSA have been adjusted for the effect of the recapitalization that occurred as a result of the reverse acquisition.

The acquisition of Foundation was based on management’s belief that Foundation’s acquisition and development strategy and operating model will enable the Company to grow by taking advantage of highly-fragmented markets, an increasing demand for short stay surgery and a need by physicians to forge strategic alliances to meet the needs of the evolving healthcare landscape while also shaping the clinical environments in which they practice. The Company expects the acquisition of Foundation will generate positive earnings and cash flow that will be accretive to the earnings and cash flow of the Company.

Simultaneous with and subject to the reverse acquisition, the Company issued 1,333,333 shares of common stock to purchase a $6.0 million participation in the credit facility owed by the Company to Arvest Bank (see Note 6 – Discontinued Operations for more information) and 1,797,030 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 $13.9 million and included the common stock attributable to existing Graymark shareholders and the issuance of the Company’s common stock to Arvest Bank and Mr. Oliver.

The fair value amounts were initially recorded using preliminary estimates. Subsequently, management engaged a third-party valuation company to complete a valuation of the fair value of the assets acquired and liabilities assumed in the reverse acquisition. The preliminary and final purchase allocations for the reverse acquisition are as follows:

	Preliminary		Final
Cash and cash equivalents	$	68,170	$	68,170
Accounts receivable	249,333		249,333
Current assets from discontinued operations	1,773,471		1,360,143
Other current assets	198,977		198,976
Total current assets	2,289,951		1,876,622
Property and equipment	647,862		1,389,169
Intangible assets	3,800,000		2,733,000
Goodwill	20,847,608		21,864,781
Other assets from discontinued operations	295,542		1,224,140
Other assets	12,753		252,528
Total assets acquired	27,893,716		29,340,240
Liabilities assumed:
Accounts payable and accrued liabilities	2,501,877		2,899,823
Short term debt	2,000,000		2,000,000
Current portion of long-term debt	714,711		714,711
Current liabilities from discontinued operations	7,812,192		7,375,521
Total current liabilities	13,028,780		12,990,055
Long-term debt, net of current portion	742,385		742,385
Other liabilities from discontinued operations	174,509		305,969
Other liabilities	575,000		1,362,957
Total liabilities assumed	14,520,674		15,401,366
Net assets acquired	$	13,373,042	$	13,938,874

During the year ended December 31, 2013, the Company incurred approximately $506,000 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 year ended December 31, 2013, and the revenue and earnings of the combined entity had the reverse acquisition date for Graymark been January 1, 2013 are as follows:

			Loss From						Attributable to Foundation
	Revenue		Continuing Operations			Net Loss			Net Loss			Net Loss Per Share
Actual:
From 7/22/2013 to12/31/2013	$	968,729	$	(23,413,107	)	$	(24,995,058	)	$	(24,995,058	)
Supplemental Pro Forma:
From 1/1/2013 to 12/31/2013	$	94,514,058	$	(24,733,907	)	$	(19,402,769	)	$	(23,616,628	)	$	(1.73	)

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.