As filed with the Securities and Exchange Commission on
December 30, 2010
Registration
No. 333-164232
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
Amendment No. 1
to
FORM S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
GRAYMARK HEALTHCARE,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Oklahoma
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8093
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20-0180812
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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210 Park Avenue, Ste. 1350
Oklahoma City, Oklahoma 73102
(405) 601-5300
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Stanton Nelson
Chief Executive Officer
Graymark Healthcare, Inc.
210 Park Avenue, Ste. 1350
Oklahoma City, Oklahoma 73102
(405) 601-5300
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
Copies to:
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Robert E. Puopolo, Esq.
Greenberg Traurig LLP
One International Place
Boston, MA 02110
(617) 310-6000
Fax: (617) 310-6001
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Michael D. Maline, Esq.
Goodwin Procter LLP
The New York Times Building
620 Eighth Avenue
New York, New York 10018
(212) 813-8800
Fax: (212) 355-3333
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Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
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 definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large Accelerated
Filer o
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Accelerated
Filer o
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Non-accelerated
Filer o
(Do not check if a smaller
reporting company
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Smaller Reporting
Companyþ
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The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
DECEMBER 30, 2010
Preliminary Prospectus
15,000,000 Shares
Graymark Healthcare,
Inc.
Common Stock
We are offering 15,000,000 shares of our common stock. Our
common stock is listed on The Nasdaq Capital Market under the
symbol GRMH. The last reported sale price of our
common stock on December 22, 2010 was $1.02 per share.
Investing in our common stock involves a high degree of
risk.
See Risk
Factors beginning on page 9.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public Offering Price
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$
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$
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Underwriting Discounts and Commissions
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$
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$
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Proceeds to Us (Before Expenses)
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$
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$
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Delivery of the shares of common stock will be made on or
about .
We expect to grant the underwriters an option for a period of
30 days to purchase, on the same terms and conditions set
forth above, up to an additional 2,250,000 shares of our
common stock to cover over-allotments, if any.
Prospectus
dated ,
2011
TABLE OF
CONTENTS
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Page
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EX-10.22.3 |
EX-23.1 |
You should rely only on the information contained in this
prospectus, any amendment or supplement hereto, any free writing
prospectus prepared by us or on our behalf, or any document
incorporated herein by reference. We have not authorized anyone
to provide you with information that is different. We are
offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus, any
free writing prospectus, or document incorporated herein by
reference is accurate only as of its date, regardless of the
time of delivery of this prospectus or any free writing
prospectus or of any sale of the common stock.
This prospectus contains estimates and other statistical data
made by independent parties relating to market size,
expenditures, growth and other data about our industry. We have
not independently verified the statistical and other industry
data generated by independent parties and contained in this
prospectus and, accordingly, we cannot guarantee their accuracy
or completeness.
Nocturna, somniCare and somniTech are registered trademarks of
Graymark Healthcare or its subsidiaries. This prospectus also
includes other Graymark Healthcare trademarks, including Sleep
Disorder Centers, and SDC as well as the registered and
unregistered trademarks of other persons. All other trademarks,
tradenames and service marks appearing in this prospectus are
the property of their respective owners.
PROSPECTUS
SUMMARY
This summary highlights selected information contained elsewhere
in this prospectus and does not contain all of the information
you need to consider in making your investment decision. You
should read carefully this entire prospectus, including the
matters set forth in the section entitled Risk
Factors, our consolidated financial statements and the
related notes which are incorporated by reference into this
prospectus and managements discussion and analysis thereof
included elsewhere in this prospectus, before deciding whether
to invest in our common stock. In this prospectus, unless
otherwise expressly stated or the context otherwise requires,
Graymark, our company, we,
us and our refer to Graymark Healthcare,
Inc., an Oklahoma corporation, and its subsidiaries and
Sleep Management Solutions, or SMS,
refer to our sleep centers and related service and supply
business, and ApothecaryRx refers to the
discontinued operations of ApothecaryRx, LLC, our subsidiary
that pertains to our discontinued business of operating
independent retail pharmacies.
We are a diversified healthcare services company whose Sleep
Management Solutions business, or SMS, is one of the largest
providers of care management solutions to the sleep disorder
market based on number of independent sleep care centers and
hospital sleep diagnostic programs operated in the United
States. We provide a comprehensive diagnosis and care management
solution for patients suffering from sleep disorders. On
December 6, 2010, we completed the sale of substantially
all of the assets of ApothecaryRx to Walgreens. ApothecaryRx
operated independent retail pharmacy stores selling prescription
drugs,
over-the-counter
drugs and an assortment of general merchandise.
Through Sleep Management Solutions, we provide diagnostic sleep
testing services and care management solutions for people with
chronic sleep disorders. In addition, we sell equipment and
related supplies and components used to treat obstructive sleep
apnea, or OSA, which is the most commonly diagnosed sleep
disorder at sleep medicine centers. OSA occurs when the soft
tissue in the rear of the throat enlarges, thus narrowing the
airway, and causing the body to temporarily stop breathing.
Our sleep management solution is driven by our clinical approach
to managing sleep disorders. Our approach to managing the care
of patients diagnosed with OSA is a key differentiator for us.
Five key elements support our clinical approach:
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Referral: Our medical directors, who are
board-certified physicians in sleep medicine, have forged strong
relationships with referral sources, which include primary care
physicians, as well as physicians from a wide variety of other
specialties and dentists.
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Diagnosis: We own and operate sleep testing
clinics that diagnose the full range of sleep disorders
including OSA, insomnia, narcolepsy and restless legs syndrome.
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CPAP Device Supply: We sell continuous
positive airway pressure, or CPAP, devices, which are used to
treat OSA.
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Re-Supply: We offer a re-supply program for
our patients and other CPAP users to obtain the required
components for their CPAP devices that must be replaced on a
regular basis.
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Care Management: We provide continuing care to
our patients led by our medical directors who are
board-certified physicians in sleep medicine and their staff.
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Our clinical approach increases the long-term CPAP device usage
compliance of our patients, and enables us to manage a
patients sleep disorder care throughout the lifecycle of
the disorder, thereby allowing us to generate a long-term,
recurring revenue stream. We generate revenues via three primary
sources: providing the diagnostic tests and related studies for
sleep disorders through our sleep diagnostic centers, the sale
of CPAP devices, and the ongoing re-supply of components of the
CPAP device that need to be replaced. In addition, as a part of
our ongoing care management program, we monitor the
patients sleep disorder and as the patients medical
condition changes we are paid for additional diagnostic tests
and studies.
In addition, we believe that our clinical approach to
comprehensive patient care provides higher quality of care and
achieves higher patient compliance. We believe that higher
compliance rates are directly correlated to
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higher revenue generation per patient compared to our
competitors through increased utilization of our re-supply
program and a greater likelihood of full reimbursement from
federal payors and those commercial carriers who have adopted
federal payor standards.
Our
Market and Opportunity
We believe that the market for Sleep Management Solutions is
large and growing with no clear market leader. A number of
factors support the future growth of this market:
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Large and undiagnosed population of patients that suffer from
sleep disorders. There are a substantial number
of undiagnosed people who could benefit from diagnosis and
treatment of sleep disorders. There are an estimated
40 million Americans that suffer from chronic, long-term
sleep disorders according to the National Institutes of Health,
or NIH. There are over 80 different sleep disorders, including
OSA, insomnia, narcolepsy and restless legs syndrome. The
primary focus of our business is OSA, which the National Sleep
Foundation estimates occurs in at least 18 million
Americans. Moreover, according to the American College of
Physicians, about
80-90% of
people with OSA go undiagnosed.
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Increasing awareness of diagnosis and treatment options,
particularly for OSA. We believe there is an
increasing awareness among the U.S. population and
physicians in particular about the health risks and the
availability and benefits of treatment options for sleep
disorders. Of significant importance, OSA can have serious
effects on peoples health and personal lives. OSA is known
to increase the risk for several serious health conditions,
including obesity, high blood pressure, heart disease, stroke,
diabetes, depression and sexual dysfunction. Additionally, OSA
may result in excessive daytime sleepiness, memory loss, lack of
concentration and irritability. OSA and its effects may increase
the risk for automobile accidents and negatively affect work
productivity and personal relationships. In addition, as
physicians become aware of the links between OSA and other
serious health conditions, physicians are increasingly referring
patients for sleep studies.
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Growth in obesity rates. OSA is found in
people of every age and body type, but is most commonly found in
the middle-aged, obese population. Obesity is currently found in
approximately 72 million adults and is a growing problem in
the United States. Obesity exacerbates OSA by enlarging the
upper airway soft tissue structures and narrowing the airway.
Not only does obesity contribute to sleep disorders such as OSA,
but sleep disorders can also contribute to obesity. We believe
that individuals suffering from OSA generally have less energy
and ability to exercise or keep a strict diet. Medical studies
have also shown that sleep disorders can impair metabolism and
disrupt hormone levels, promoting weight gain.
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Large aging population. An aging
U.S. population, led by approximately 78 million
baby-boomers, is becoming increasingly at risk for OSA. As their
soft palates enlarge, their pharyngeal fat pads increase in size
and the shape of bony structures around the airway change.
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We believe these factors present a significant business
opportunity for us because we provide a complete continuum of
care for those who suffer from OSA from initial
diagnosis to treatment with a CPAP device to providing ongoing
CPAP supplies and long-term
follow-up
care.
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The amount being spent on sleep disorder diagnosis and treatment
is increasing. A 2005 Frost & Sullivan report
estimated the U.S. sleep diagnostic market was
$1.6 billion in 2004, and that it will grow to
$4.4 billion by 2011.
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The sleep diagnostic market is highly fragmented. Our presence
as one of the largest overall providers of sleep diagnostic
services with 25 independent sleep care centers and
73 hospital sleep diagnostic programs, out of a total we
estimate includes over 3,000 sleep clinics in the United States,
illustrates the level of fragmentation in the market. Only a
limited number of companies provide a comprehensive solution
which includes initial diagnosis to treatment with a CPAP device
to providing ongoing CPAP supplies to long-term
follow-up
care.
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Competitive
Strengths
We believe the following competitive strengths position us to
grow our business and gain market share:
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Clinical approach to managing patient care that improves our
patients clinical outcomes. We believe that
we offer a clinical approach to managing our patients
care, beginning with the patients initial referral, to
diagnosis and CPAP device
set-up, and
through the long-term care management of their disorder.
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Comprehensive diagnostic and care management solution for
sleep disorder patients. The comprehensive nature
of our sleep management solution allows us to maintain a
long-term relationship with patients and their physicians, to
improve CPAP compliance rates and to achieve a diversified,
long-term recurring revenue stream over the entire lifecycle of
OSA.
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Benefits of scale. Our size allows us to
maintain an efficient cost structure across multiple facilities,
to access national contracts with third-party payors, and to
seek out new and greater revenue opportunities that will not be
available to smaller competitors that do not provide a
comprehensive sleep management solution.
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Experience in successfully executing acquisitions of viable
targets to fuel our growth and integrating the targets into our
operations. We believe that the highly fragmented
sleep diagnostic market, coupled with barriers to entry caused
by the dynamic and complex regulatory environment, creates an
opportunity for consolidation that we are uniquely positioned to
take advantage of due to our business model and our experience
in successfully implementing an acquisition strategy.
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Strong management team with an extensive track record of
successful growth of healthcare-related businesses through
acquisition as well as political and regulatory
experience. Our management team has over 115
combined years in healthcare-related businesses and
10 years of experience working in the legislative and
regulatory arenas at both the federal and state levels.
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Our
Growth Strategy
We intend to grow as a provider of sleep diagnostic services and
care management for sleep disorders. The following are the key
elements of our growth strategy:
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Expand sleep diagnostic and care management capabilities
through strategic acquisitions. We intend to
drive growth primarily by acquiring successful sleep clinics and
in our existing geographic markets and by expanding into new
markets.
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Drive internal growth. We use marketing
initiatives to increase the awareness of sleep disorders and
their negative health effects, as well as to promote our
comprehensive solution to those that suffer from sleep disorders
in the markets we serve. We also use direct marketing
representatives to identify strategic hospital and physician
group alliances and to market our sleep diagnostic services and
care management alternatives to area physicians.
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Expand on-going care management and disposable re-supply
program. Generally OSA is a long-term chronic
disorder, and patients being treated for OSA are generally
treated for life. With our comprehensive model of care, ability
to improve patient compliance with therapy, and scale, we are
able to maintain a long-term, diversified, recurring revenue
stream throughout the entire life-cycle of the OSA sleep
disorder.
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Risks
Associated With Our Business
Our ability to execute our strategy and capitalize on our
competitive strengths is subject to a number of risks more fully
discussed in the Risk Factors section immediately
following this summary. Before you invest in our shares, you
should carefully consider all of the information in this
prospectus, including matters set forth under the heading
Risk Factors, such as:
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changes to the programs of third-party payors could adversely
affect our revenues and profitability;
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delays or decreases in reimbursement from insurance or
government payors could adversely affect our liquidity;
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our industry is highly competitive, fragmented and
market-specific, with limited barriers to entry;
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we are subject to extensive government regulation; and
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our current principal stockholders will continue to have
significant influence over us after this offering.
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Company
Information
We are organized in the state of Oklahoma. Prior to
December 31, 2007, we were named Graymark Productions, Inc.
and were an independent producer and distributor of film
entertainment content. On January 2, 2008, we completed the
acquisition of ApothecaryRx, LLC (ApothecaryRx) and
SDC Holdings, LLC (SDC Holdings) through a reverse
triangular merger and in connection therewith changed our name
to Graymark Healthcare, Inc. On December 6, 2010, we
completed the sale of substantially all of the assets of
ApothecaryRx. SDC Holdings is organized in the state of Oklahoma
and began operations on January 31, 2007. Our principal
executive offices are located at 210 Park Avenue,
Suite 1350, Oklahoma City, Oklahoma 73102. Our telephone
number is
(405) 601-5300.
We maintain a website at www.graymarkhealthcare.com. The URL of
our website is included herein as an inactive textual reference.
Information contained on, or accessible through, our website is
not a part of, and is not incorporated by reference into, this
prospectus.
4
The
Offering
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Common stock offered by us |
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15,000,000 shares |
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Common stock to be outstanding immediately after this offering
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43,953,611 shares |
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Use of proceeds |
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We estimate that we will receive net proceeds from this offering
of approximately $13.7 million, after deducting the
estimated underwriting discounts and estimated offering
expenses. We intend to use $5.0 million of the net proceeds
to repay amounts owed under our credit facility with Arvest
Bank, with the remainder to fund potential acquisitions for our
Sleep Management Solutions business, though no acquisitions have
yet been identified, and for working capital and general
corporate purposes. |
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Dividend policy |
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We have never declared or paid any dividends to the holders of
our common stock and we do not expect to pay cash dividends in
the foreseeable future. We currently intend to retain all
earnings for repayment of amounts owed under our credit facility
and term loan, for use in connection with the expansion of our
business, for working capital and general corporate purposes. |
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Nasdaq Capital Market symbol |
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GRMH |
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Risk Factors |
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See Risk Factors beginning on page 9 for a
discussion of factors that you should consider carefully before
deciding whether to purchase shares of our common stock. |
Unless otherwise indicated, this prospectus reflects and assumes
no exercise by the underwriter of its overallotment option.
(1) The number of shares of common stock to be outstanding
after this offering is based on 28,974,884 shares of common
stock outstanding on September 30, 2010.
(2) The number of shares of common stock to be outstanding
after this offering excludes, as of September 30, 2010:
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376,398 shares issuable upon the exercise of stock options
at a weighted average price of $3.43 per share; and
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300,270 shares issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $2.35 per share.
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(3) The
one-for-five
reverse stock split affected on April 11, 2008.
5
Summary
Historical and Pro Forma Consolidated Financial and Other
Data
The following tables present our summary consolidated historical
statement of operations data for the period covering
July 1, 2006 (inception) through December 31, 2006,
for the fiscal years ended December 31, 2007, 2008, and
2009, for the nine months ended September 30, 2009 and
2010, our historical results on a pro forma basis adjusted for
our acquisitions of somniTech, Inc., somniCare, Inc.
(collectively, Somni) and Avastra Eastern Sleep
Centers, Inc., or Eastern, for the years ended December 31,
2008 and 2009, and our summary consolidated historical and pro
forma as adjusted balance sheet data as of December 31,
2009. The summary statement of operations data for the period
covering July 1, 2006 (inception) through December 31,
2006 and the fiscal year ended December 31, 2007 are
derived from our audited consolidated financial statements which
are not incorporated by reference or included in this
prospectus. The summary statement of operations data for the
fiscal years ended December 31, 2008 and 2009 are derived
from our audited consolidated financial statements as of and for
the fiscal years ended December 31, 2008 and 2009
incorporated by reference into this prospectus. The summary
consolidated statement of operations data for the nine months
ended September 30, 2009 and 2010 and our historical
results on a pro forma basis adjusted for our acquisitions of
Somni and Eastern for the years ended December 31, 2008 and
2009 and the selected balance sheet data as of
September 30, 2010 have been derived from our unaudited
consolidated financial statements incorporated by reference into
this prospectus. Our unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated
financial statements and notes thereto, which include, in the
opinion of our management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the
information for the unaudited interim period. Our historical
results for prior interim periods are not necessarily indicative
of results to be expected for a full fiscal year or for any
future period. You should read this data together with our
consolidated financial statements and related notes incorporated
by reference into this prospectus and the information under
Selected Historical Consolidated Financial and Other
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations.
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Audited
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Unaudited
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Actual for
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July 1
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Pro Forma
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to
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Actual For Years Ended
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Actual for Nine Months
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Years Ended
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December 31
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December 31,
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Ended September 30,
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December 31,
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2006
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2007
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2008
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2009
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2009
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2010
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2008
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2009
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Statement of Operations Data:
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Revenues
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$
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$
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9,553,230
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$
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15,292,164
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$
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17,571,539
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$
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11,449,888
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$
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17,497,513
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$
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27,441,366
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$
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25,846,789
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Costs and Expenses:
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Cost of services and sales
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3,633,929
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5,779,918
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7,735,085
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3,512,272
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5,337,228
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9,959,992
|
|
|
|
10,495,459
|
|
Selling, general and administrative
|
|
|
|
|
|
|
3,398,931
|
|
|
|
7,726,693
|
|
|
|
12,501,994
|
|
|
|
11,934,515
|
|
|
|
14,197,288
|
|
|
|
13,381,041
|
|
|
|
16,603,651
|
|
Change in accounting estimate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,648,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,648,207
|
|
Impairment of goodwill
|
|
|
|
|
|
|
204,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
762,224
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
313,874
|
|
|
|
598,627
|
|
|
|
1,074,132
|
|
|
|
761,758
|
|
|
|
1,040,891
|
|
|
|
1,160,562
|
|
|
|
1,469,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,550,734
|
|
|
|
14,105,238
|
|
|
|
23,959,418
|
|
|
|
16,208,545
|
|
|
|
21,337,631
|
|
|
|
24,501,595
|
|
|
|
31,216,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
|
|
|
|
(935,874
|
)
|
|
|
(696,181
|
)
|
|
|
(952,724
|
)
|
|
|
(616,380
|
)
|
|
|
(919,280
|
)
|
|
|
(857,396
|
)
|
|
|
(1,108,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
Unaudited
|
|
|
|
Actual for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
to
|
|
|
Actual For Years Ended
|
|
|
Actual for Nine Months
|
|
|
Years Ended
|
|
|
|
December 31
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
|
|
|
|
1,066,622
|
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(5,375,037
|
)
|
|
|
(4,759,398
|
)
|
|
|
2,082,375
|
|
|
|
(6,477,845
|
)
|
Benefit (provision) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,000
|
|
|
|
(47,192
|
)
|
|
|
(636,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
|
|
|
|
1,066,622
|
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(5,167,037
|
)
|
|
|
4,806,590
|
)
|
|
|
1,445,723
|
|
|
|
(6,477,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes
|
|
|
(269,444
|
)
|
|
|
(5,558,289
|
)
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
1,279,707
|
|
|
|
(623,399
|
)
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
(269,444
|
)
|
|
|
(4,491,667
|
)
|
|
|
1,297,368
|
|
|
|
(5,341,702
|
)
|
|
|
(3,887,330
|
)
|
|
|
(5,429,989
|
)
|
|
|
2,252,346
|
|
|
|
(4,478,944
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
|
664,862
|
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
(241,768
|
)
|
|
|
(95,961
|
)
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) attributable to Graymark Healthcare
|
|
$
|
(269,444
|
)
|
|
$
|
(5,156,529
|
)
|
|
$
|
744,398
|
|
|
$
|
(5,187,896
|
)
|
|
$
|
(3,645,562
|
)
|
|
$
|
(5,334,028
|
)
|
|
$
|
1,699,376
|
|
|
$
|
(4,325,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to
Graymark Healthcare
|
|
$
|
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.22
|
)
|
Net income (loss) from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.27
|
)
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
0.05
|
|
|
|
(0.02
|
)
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
20,400,000
|
|
|
|
20,404,905
|
|
|
|
25,885,628
|
|
|
|
28,414,508
|
|
|
|
28,116,089
|
|
|
|
28,991,304
|
|
|
|
26,638,423
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding assuming dilution
|
|
|
20,400,000
|
|
|
|
20,404,905
|
|
|
|
26,102,841
|
|
|
|
28,414,508
|
|
|
|
28,116,089
|
|
|
|
28,991,304
|
|
|
|
26,855,636
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
The following table presents our summary consolidated balance
sheet data as of September 30, 2010:
|
|
|
|
|
on an actual basis; and
|
|
|
|
|
|
on an as adjusted basis to further reflect the receipt by us of
net proceeds of $13.7 million from the sale of the common
stock offered by us in this offering, less underwriting
discounts and commissions and estimated offering expenses
payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
Actual
|
|
|
As Adjusted(1)
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
533,770
|
|
|
$
|
9,273,770
|
|
Working capital
|
|
|
7,114,477
|
|
|
|
15,818,477
|
|
Total assets
|
|
|
72,175,108
|
|
|
|
80,879,108
|
|
Long-term debt, including current portion
|
|
|
22,417,026
|
|
|
|
17,417,026
|
|
Total liabilities from discontinued operations
|
|
|
33,625,516
|
|
|
|
33,625,516
|
|
Accumulated Deficit
|
|
|
(15,416,999
|
)
|
|
|
(15,416,999
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
14,005,216
|
|
|
$
|
27,709,216
|
|
|
|
|
|
|
|
|
|
|
8
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below
before deciding to invest in shares of our common stock. Our
business, prospects, financial condition or operating results
could be materially adversely affected by any of these risks.
The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your investment.
In assessing the risks described below, you should also refer to
the other information contained in or incorporated by reference
into this prospectus, including our consolidated financial
statements and the related notes, before deciding to purchase
any shares of our common stock.
Risks
Related to Our Business
We
have a bank credit facility of approximately $23 million
and we may not achieve compliance with the Debt Service Coverage
Ratio requirements which begin December 31, 2010 or subject
to certain conditions, March 31, 2011.
We are party to an amended Loan Agreement with Arvest Bank (the
Arvest Credit Facility). The Arvest Credit Facility
provides for a term loan in the principal amount of
$30 million (referred to as the Term Loan) and
provides an additional credit facility in the principal amount
of $15 million (the Acquisition Line) for total
principal of $45 million. As of September 30, 2010,
the outstanding principal amount of the Arvest Credit Facility
was $44,396,935. In connection with our sale of the assets of
ApothecaryRx to Walgreens, we reduced the outstanding balance on
the Arvest Credit Facility by $22 million as of
December 6, 2010 to approximately $22.4 million.
Commencing with the calendar quarter ending December 31,
2010 and thereafter during the term of the Arvest Credit
Facility, based on the latest four rolling quarters, we agreed
to continuously maintain a Debt Service Coverage
Ratio of not less than 1.25 to 1. However, Arvest Bank
will extend the compliance date to March 31, 2011 if
certain payments are made from the proceeds of the ApothecaryRx
Sale. As of September 30, 2010, our Debt Service Coverage
Ratio is less than 1.25 to 1. The Debt Service Coverage Ratio is
calculated using the latest four rolling quarters. We are
currently developing and executing a combination of strategic,
operational and debt reduction strategies and expect to be in
compliance with the Debt Service Coverage Ratio by
March 31, 2011. However, if we are unsuccessful in fully
executing these strategies, there is no assurance that Arvest
Bank will waive or further delay the requirement.
In the event a default is not cured within 10 days
following notice of the default by Arvest Bank, Arvest Bank will
have the right to declare the outstanding principal and accrued
and unpaid interest immediately due and payable. Payment and
performance of our obligations under the Arvest Credit Facility
are secured by the personal guaranties of the Guarantors and in
general our assets. In addition, in connection with a third
amendment to the Arvest Credit Facility in July 2010, we also
entered into a Deposit Control Agreement with Arvest Bank
covering our accounts at Valliance Bank. Arvest Bank may
exercise its rights to give instructions to Valliance Bank under
the Deposit Control Agreement only in the event of an uncured
default under the Loan Agreement, as amended.
If Arvest Bank accelerates 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 Arvest Bank accelerates the due dates
for such amounts. Since we have granted Arvest Bank a security
interest in all of our assets, Arvest Bank could elect to
foreclose on such assets as well as to move to enforce the
guaranty which is provided by certain of our current and former
officers and directors. If Arvest Bank declares an event of
default
and/or
accelerates the payment of our obligations under the Arvest
Credit Facility, then the disclosure of such fact may cause a
material decrease in the price of our stock on The Nasdaq
Capital Market. 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.
9
We
need to obtain additional financing to fund our ongoing working
capital needs.
We currently fund our working capital needs with cash generated
from operations and from funds previously raised from equity and
debt financings. We are currently evaluating various measures to
maintain sufficient liquidity for the continuity of normal
business operations. Certain of these options include the
acceleration of collection of our accounts receivable, the
deceleration of payments on our trade payables, the negotiation
of extended payment terms with certain of our vendors and the
possibility of raising additional capital through the issuance
and sale of equity or debt securities. We continually project
and evaluate our cash and working capital needs and plan for the
timing of these payments, but there can be no assurance that we
can raise additional capital or maintain liquidity sufficient to
fund our working capital for normal business operations. If we
are unable to maintain working capital sufficient for normal
business operations, our business, results of operation and
financial position may be materially adversely affected.
We
require a significant amount of cash flow from operations and
third-party financing to pay our indebtedness, to execute our
business plan and to fund our other liquidity
needs.
We may not be able to generate sufficient cash flow from
operations, and future borrowings may not be available to us
under existing loan facilities or otherwise in an amount
sufficient to pay our indebtedness, to execute our business plan
or to fund our other liquidity needs. We anticipate the need for
substantial cash flow to fund future acquisitions, which is our
primary growth strategy. In addition, we may need to refinance
some or all of our current indebtedness at or before maturity.
We incurred indebtedness with an outstanding balance at
September 30, 2010 of approximately $44.4 million to
fund the acquisitions of our existing sleep centers and
pharmacies, in the form of a credit facility and term loan. The
outstanding balance on the Arvest Credit Facility has been
reduced to $22.4 million from proceeds of the sale of
ApothecaryRxs assets to Walgreens which closed in the
fourth quarter of 2010. The outstanding principal amounts under
the credit facility and the term loan bear interest at the
greater of the Wall Street Journal prime rate or 6%. Prior to
June 30, 2010, the floor rate was 5%. Further details about
this indebtedness can be found in the footnotes to our interim
financial statements included elsewhere in this report and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. We have also incurred
debt obligations from seller financing in connection with some
of our acquisitions, the outstanding balance of which, at
September 30, 2010, was approximately $1.6 million.
The outstanding balance on our seller financing debt carries
interest rates that range from 0.0% to 7.65% with maturity dates
ranging from March 2011 to November 2013.
At September 30, 2010, we had total liabilities of
approximately $58.2 million. Because of our lack of
significant historical operations, there is no assurance that
our operating results will provide sufficient funding to pay our
liabilities on a timely basis. There is no assurance that we
will be able to refinance any of our current indebtedness on
commercially reasonable terms or at all. Failure to generate or
raise sufficient funds may require us to modify, delay or
abandon some of our future business growth strategies or
expenditure plans.
The
markets for sleep diagnostic services and sale of related
products are highly competitive, and we compete against
substantially larger healthcare providers, including hospitals
and clinics.
Competition among companies that provide healthcare services and
supplies is intense. If we are unable to compete effectively
with existing or future competitors, we may be prevented from
retaining our existing customers or from attracting new
customers, which could materially impair our business. There are
a number of companies that currently offer or are in the process
of offering services and supplies that compete with our sleep
diagnostic and care management services and related product and
supplies sales. These competitors may succeed in providing
services and products that are more effective, less expensive or
both, than those we currently offer or that would render some of
our services or supplies obsolete or non-competitive. Some of
our competitors may submit lower bids in a competitive bidding
process or may be able to accept lower reimbursement rates from
third party payors, thus gaining market share in our target
markets. Many of our competitors have greater financial,
research and development, manufacturing, and marketing resources
than we
10
have and may be in a better position than us to withstand the
adverse effects on gross margins and profitability caused by
price decreases prevalent in this competitive environment.
If
third party payors determine that we violate Medicare, Medicaid
or other payor reimbursement laws, regulations, or requirements,
our revenues may decrease, we may have to restructure our method
of billing and collecting Medicare, Medicaid or other payor
program payments, respectively, and we could incur substantial
defense costs and be subject to fines, monetary penalties and
exclusion from participation in government-sponsored programs
such as Medicare and Medicaid.
Our operations, including our billing and other arrangements
with healthcare providers, are subject to extensive federal and
state government regulation and requirements of other
third-party payors. Such regulations and requirements include
numerous laws directed at payment for services, conduct of
operations, preventing fraud and abuse, laws prohibiting general
business corporations, such as us, from practicing medicine,
controlling physicians medical decisions or engaging in
some practices such as splitting fees with physicians, laws
regulating billing and collection of reimbursement from
government programs, such as Medicare and Medicaid, and
requirements of other payors. Those laws and requirements may
have related rules and regulations that are subject to
alternative interpretations and may not provide definitive
guidance as to their application to our operations, including
our arrangements with hospitals, physicians and professional
corporations.
For our SMS business, we verify patient benefit eligibility
prior to providing services or products. We submit claims for
service and products after they have been provided. Claims are
supported by required documentation including physician orders.
Despite our measures to ensure compliance with Medicare,
Medicaid, or other payor billing standards, such third-party
payors may disallow, in whole or in part, requests for
reimbursement based on determinations that certain amounts are
not reimbursable, that the service was not medically necessary,
that there was a lack of sufficient supporting documentation, or
for other reasons. Incorrect or incomplete documentation and
billing information could result in nonpayment, recoupment or
allegations of billing fraud.
We are not aware of any inquiry, investigation or notice from
any governmental entity or other payor indicating that we are in
violation of any of the Medicare, Medicaid or other payor
reimbursement laws, regulations, or requirements. We believe we
are in substantial compliance with these laws, rules and
regulations based upon what we believe are reasonable and
defensible interpretations of these laws, rules and regulations.
However, such laws and related regulations and regulatory
guidance may be ambiguous or contradictory, and may be
interpreted or applied by prosecutorial, regulatory or judicial
authorities in ways that we cannot predict. If federal or state
government officials or other payors challenge our operations or
arrangements with third parties that we have structured based
upon our interpretation of these laws, rules and regulations,
the challenge could potentially disrupt our business operations
and we may incur substantial defense costs, even if we
successfully defend our interpretation of these laws, rules and
regulations. In addition, if the government or other payors
successfully challenge our interpretation as to the
applicability of these laws, rules and regulations as they
relate to our operations and arrangements with third parties, we
would potentially incur substantial cost restructuring our
billing practice, as well as fines or penalties for
non-compliance which could have a material adverse effect on our
business, financial condition and results of operations.
In the event regulatory action were to limit or prohibit us from
carrying on our business as we presently conduct it or from
expanding our operations to certain jurisdictions, we may need
to make structural, operational and organizational modifications
to our company
and/or our
contractual arrangements with third-party payors, physicians, or
others. Our operating costs could increase significantly as a
result. We could also lose contracts or our revenues could
decrease under existing contracts. Any restructuring would also
negatively impact our operations because our managements
time and attention would be diverted from running our business
in the ordinary course.
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We are
subject to complex rules and regulations that govern our
licensing and certification, and the failure to comply with
these rules can result in delays in, or loss of, reimbursement
for our services or civil or criminal sanctions.
There has been a trend developing to require facilities that
provide sleep diagnostic testing and durable medical equipment
to become accredited by an approved accreditation organization
as well as additional credentialing for physicians diagnosing
sleep disorders and the licensing of technical personnel to
perform diagnostic testing procedures. As of November 15,
2010, 14 of our free standing sleep centers are accredited by
the American Academy of Sleep Medicine, or the AASM. Another
three free standing sleep centers are accredited through The
Joint Commission. We are actively pursuing accreditation for our
remaining sleep centers. We believe we will achieve full
accreditation for these centers by mid-2011. Additionally, as of
September 30, 2009, Medicare required that all Durable
Medical Equipment (DME) suppliers be accredited with the
exception of pharmacies supplying DME, whose deadline was
extended to January 1, 2010. All of our sleep therapy
facilities providing DME were granted accreditation by The Joint
Commission or by the Accreditation Commission for Healthcare, or
ACHC. One of our DME suppliers, somniCare Overland Park, Kansas
location, recently underwent the nations first ever DME
site accreditation visit held by the AASM, to which we expect to
have a letter of certification as the first accredited sleep
therapy company by the AASM.
Physicians, physician assistants, nurse practitioners, and
respiratory therapists who provide services as part of our
operations are required to obtain and maintain certain
professional licenses or certifications and are subject to state
regulations regarding professional standards of conduct.
Some states also require our free-standing diagnostic testing
facilities and DME providers to be licensed by or registered
with state authorities such as state departments of health. We
believe that we are in compliance with the licensing and
registration in applicable states.
Some state laws require that companies dispensing DME and
supplies within the state be licensed by the state board of
pharmacy. We currently have a pharmacy license for dispensing of
durable medical equipment and supplies in applicable states.
The relevant laws and regulations are complex and may be unclear
or subject to interpretation. Currently we believe we are in
compliance with all requisite regulatory authorities; however,
agencies that administer these programs may find that we have
failed to comply in some material respects. Failure to comply
with these licensing, certification and accreditation laws,
regulations and standards could result in our services being
found non-reimbursable or prior payments being subject to
recoupment, and can give rise to civil or, in extreme cases,
criminal penalties.
Government
and private insurance plans may further reduce or discontinue
healthcare reimbursements, which could result in reductions in
our revenue and operating margins.
A substantial portion of the cost of medical care in the United
States is funded by managed care organizations, insurance
companies, government funded programs, employers and other
third-party payors, which are collectively referred to as
third-party plans. These plans continue to seek cost
containment. If this funding were to be reduced in terms of
coverage or payment rates or were to become unavailable to our
sleep disorder patients, our business will be adversely
affected. Furthermore, managed care organizations and insurance
companies are evaluating approaches to reduce costs by
decreasing the frequency of treatment or the utilization of a
medical device or product. These cost containment measures have
caused the decision-making function with respect to purchasing
to shift in many cases from the physician to the third-party
plans or payors, resulting in an increased emphasis on reduced
price, as opposed to clinical benefits or a particular
products features. Efforts by U.S. governmental and
private payors to contain costs will likely continue. Because we
generally receive payment for our sleep diagnostic services and
related products directly from these third-party plans, our
business operations are dependent upon our ability to obtain
adequate and timely reimbursement for our sleep diagnostic
services and related products.
The third-party payors include Medicare, Medicaid and private
health insurance providers. These payors may deny reimbursement
if they determine that a diagnostic test was not covered under
the patients plan or
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performed properly or that a device is not covered under the
patients plan, is not used in accordance with approved
indications, or is unnecessary or deemed to be inappropriate
treatment for the patient. For example, federal payors and
commercial concerns that have adopted similar standards will
only fully reimburse us for a CPAP device if the patient can
demonstrate compliance for the first 90 days after the
initial
set-up.
Third-party payors are also increasingly challenging prices
charged for medical products and services. There is no assurance
that our sleep diagnostic services and the related products will
be considered cost-effective by third-party payors, that
reimbursement will be available, or that payors
reimbursement policies will not adversely affect our ability to
offer and sell our services and products on a profitable basis,
if at all.
Changes
in reimbursement levels for sleep diagnostic services and
related products continue to reduce our margins and could have a
material, adverse effect on our overall operating
results.
During the nine-month period ended September 30, 2010, and
for the fiscal years ended December 31, 2009 and 2008, we
were wholly or partially reimbursed by third-party plans for
approximately 99%, 96% and 99%, respectively of our revenue from
sleep diagnostic services and product sales. The sleep
diagnostic and prescription sales revenue reimbursed by
third-party plans, including Medicare and Medicaid plans,
generally have lower gross margins compared to sales or services
paid outside a third-party plan. Increases in the costs of our
sleep related products may not be sufficiently offset by
increases in reimbursement rates. In addition, continued
increases in co-payments by third-party plans may result in
decreases in sales and revenue, operating and cash flow losses,
and may deplete working capital reserves.
In particular, Medicare and Medicaid programs are subject to
statutory and regulatory changes, retroactive and prospective
reimbursement rate adjustments, administrative rulings,
executive orders and freezes and funding restrictions, all of
which may significantly impact our operations. During the
nine-month period ended September 30, 2010 and for the
fiscal years ended December 31, 2009 and 2008, 21%, 18% and
6%, respectively, of our sleep diagnostic revenues were
attributable to Medicaid and Medicare reimbursement. Over the
last several years, a number of states experiencing budget
deficits have moved to reduce Medicaid reimbursement rates as
part of healthcare cost containment.
We
depend on reimbursements by third-party payors, as well as
payments by individuals, which could lead to delays and
uncertainties in the reimbursement process.
We receive a substantial portion of our payments for sleep
center services and related supplies from third-party payors,
including Medicare, Medicaid, private insurers and managed care
organizations. During the nine months ended September 30,
2010 and the fiscal year ended December 31, 2009, our sleep
diagnostic payors mix, as a percentage of total sleep center
revenues, was approximately 77% and 78% managed care
organizations, 21% and 18% Medicaid/Medicare and 1% and 4%
private-pay, respectively. Pricing for private-pay patients is
based on prevailing regional market rates.
The reimbursement process is complex and can involve lengthy
delays. Third-party payors continue their efforts to control
expenditures for healthcare, including proposals to revise
reimbursement policies. While we recognize revenue when
healthcare services are provided, there can be delays before we
receive payment. In addition, third-party payors may disallow,
in whole or in part, requests for reimbursement based on
determinations that certain amounts are not reimbursable under
plan coverage, that services provided were not medically
necessary, or that additional supporting documentation is
necessary. Retroactive adjustments may change amounts realized
from third-party payors. These risks may be exacerbated for
patients for whom we are
out-of-network.
We are subject to governmental audits of our reimbursement
claims under Medicare and Medicaid and may be required to repay
these agencies if a finding is made that we were incorrectly
reimbursed. Delays and uncertainties in the reimbursement
process may adversely affect accounts receivable, increase the
overall costs of collection and cause us to incur additional
borrowing costs.
We also may not be paid with respect to co-payments and
deductibles that are the patients financial
responsibility, or in those instances when our facilities
provide services to uninsured and underinsured individuals.
Amounts not covered by third-party payors are the obligations of
individual patients for which we
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may not receive whole or partial payment. In such an event, our
earnings and cash flow would be adversely affected.
Healthcare
reform has been enacted into law and could impact the
profitability of our business.
The Affordable Care Act, enacted in March 2010, is dramatically
altering the U.S. health care system. The law is intended
to increase access to health care and health insurance services,
increase the quality of care that is provided, and control or
reduce health care spending. In addition, health care reform
reduces Medicare and Medicaid payments to hospitals and other
healthcare providers and bundle payments to hospitals,
physicians, and other providers for certain services. We are
unable to predict how changes in the law or new interpretations
of existing laws may have a dramatic effect on the costs
associated with doing business and the amount of reimbursement
patients and customers receive both from government and
third-party plans or payors. Federal, state and local government
representatives will, in all likelihood, continue to review and
assess alternative regulations and payment methodologies.
Healthcare reform and enforcement initiatives of federal
and state governments may also affect our sales and revenue.
These include:
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Significant reductions in spending on Medicare, Medicaid and
other government programs;
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changes in programs providing for lower reimbursement rates for
the cost healthcare products and services by third-party plans
or payors;
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regulatory changes relating to the approval process for
healthcare products and services in general.
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There is uncertainty regarding the nature of healthcare reform
implementation and whether there will be other changes in the
administration of governmental healthcare programs or
interpretations of governmental policies or other changes
affecting the healthcare system. Recently enacted or future
healthcare or budget legislation or other changes, including
those referenced above, may materially adversely affect our
business resulting in operating and cash flow losses, depletion
of working capital reserves and adversely affect our financial
condition.
We
rely on primary suppliers of sleep related products to sell
their products to us on satisfactory terms, and a disruption in
our relationship with these suppliers could have a material,
adverse effect on our business.
We are dependent on merchandise vendors to provide sleep
disorder related products for our resale. Our largest sleep
product supplier is Resmed, which supplied approximately 46% and
37% of our sleep supplies in the nine-month period ended
September 30, 2010 and in the fiscal years ended
December 31, 2009, respectively. In the fiscal year ended
December 31, 2008 our largest sleep product supplier was
Fisher and Paykel Healthcare, which supplied approximately 44%
of our sleep supplies. In our opinion, if any of these
relationships were terminated or if any contracting party were
to experience events precluding fulfillment of our needs, we
would be able to find a suitable alternative supplier, but
possibly not without significant disruption to our business.
This could take a significant amount of time and result in a
loss of customers and revenue, operating and cash flow losses
and may deplete working capital reserves.
We
could be subject to professional liability lawsuits, some of
which we may not be fully insured against or reserved for, which
could adversely affect our financial condition and results of
operations.
In recent years, physicians, hospitals and other participants in
the healthcare industry have become subject to an increasing
number of lawsuits alleging medical malpractice and related
legal theories such as negligent hiring, supervision and
credentialing, and vicarious liability for acts of their
employees or independent contractors. Many of these lawsuits
involve large claims and substantial defense costs. We maintain
professional liability insurance, which covers third-party
claims that may be brought against the physicians and staff that
work at our sleep centers, up to a maximum of $3 million,
which amount may be insufficient to satisfy all third-party
claims that may be brought against our healthcare professionals.
14
We are
dependent upon our ability to recruit and retain physicians who
are properly licensed and certified in the specialty of sleep
medicine to oversee our sleep centers and provide medical
services to our patients.
Our success depends largely upon our ability to recruit and
retain physicians who are licensed to practice medicine in the
jurisdictions relevant to the sleep diagnostic testing centers.
We currently have medical directors who oversee each of our
sleep centers, provide sleep study interpretations and
consultations to our patients. The loss of one or more medical
directors could result in a time-consuming search for a
replacement, and could distract our management team from the
day-to-day
operations of our business. Any change in our relationship with
our supervising or interpreting physicians, whether resulting
from a dispute between the parties, a change in government
regulation, or the loss of contracts with these physicians,
could impair our ability to provide services and could have a
material adverse affect on our business, financial condition and
operations.
In many markets our success is highly dependent upon the
continuing ability to recruit and retain qualified sleep
specialists to supervise sleep diagnostic testing services and
interpret results of such tests for us due to the current
shortage of sleep specialists in the medical profession. We face
competition for sleep specialists from other healthcare
providers, including hospitals and other organizations. The
competitive demand for sleep specialists may require us in the
future to offer higher compensation in order to secure the
services of sleep specialists. As a result, our compensation
expense for our affiliated sleep specialists may increase and if
we were not able to offset any such increase by increasing our
prices, this could have a material adverse effect on our results
of operations. An inability to recruit and retain sleep
specialists would have a material adverse effect on our ability
to maintain accreditation status and would adversely affect our
results of operations.
The
loss of our accreditation or our inability to obtain
accreditation could negatively impact our business and operating
results.
There has been a trend developing to require facilities that
provide sleep diagnostic testing and equipment to become
accredited by a Medicare approved accreditation organization in
order to obtain reimbursement for provided such services. It is
anticipated that many other government and private payors will
follow suit requiring accreditation by certain approved
organizations as a condition to reimbursement for sleep testing
and treatment services or products. The loss of our
accreditation or our inability to obtain accreditation for new
facilities or existing facilities not yet accredited could cause
us to be unable to provide services to certain accredited
institutions, could cause non-compliance with certain of our
third party payor contracts, and could cause us to lose our
ability to participate in certain government programs such as
Medicare, all of which could, in turn, negatively impact our
financial condition and results of operations.
As a
result of corporate practice of medicine laws in certain states
in which we are located, we are highly dependent upon our
Independent Medical Practices, which we do not
own.
We provide our services directly to our patients in most
circumstances. However, some states in which we operate, such as
New York and Florida, prohibit the practice of medicine by a
general business corporation. In those states we provide
administrative and other services to independent medical
practices, Daniel I. Rifkin, M.D., P.C. d/b/a Amherst
Sleep Medicine and Coral Springs Sleep Medicine, Inc.
(collectively referred to as Independent Medical Practices). The
Independent Medical Practices are wholly owned by
Dr. Daniel I. Rifkin. While the ownership of Independent
Medical Practices is subject to certain restrictions contained
in management agreements between us and each of them, any change
in our relationship, whether resulting from a dispute between
the entities or their respective owners, a change in government
regulation, or the loss of these Independent Medical Practices,
could impair our ability to provide services and could have a
material adverse affect on our business, financial condition and
operations in those particular states. In addition, if we
acquire other sleep diagnostic businesses in states that require
an independent medical practice structure, this risk would
intensify.
15
If our
arrangements with physicians or our patients are found to
violate state laws prohibiting the practice of medicine by
general business corporations or fee splitting, our business,
financial condition and ability to operate in those states could
be adversely affected.
The laws of many states, including states in which we engage
physicians to perform medical services, prohibit us from
exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements,
such as splitting professional fees with physicians. These laws
and their interpretations vary from state to state and are
enforced by state courts and regulatory authorities, each with
broad discretion. In states which do not allow us to exercise
control over physicians or prohibit certain financial
arrangements, we enter into agreements with physicians as
independent contractors pursuant to which they render
professional medical services. In some states, such as New York,
we are only able to enter into agreements with independent
physicians in which we provide administrative and other
services. In addition, in some states, we enter into agreements
with physicians to deliver professional sleep interpretation
services and professional clinic services in exchange for a
service fee.
We structure our relationships with physicians in a manner that
we believe is in compliance with prohibitions against the
corporate practice of medicine and fee splitting. While we have
not received notification from any state regulatory or similar
authorities asserting that we are engaged in the corporate
practice of medicine or that the payment of service fees to us
by physicians or to physicians by us constitutes fee splitting,
if such a claim were successful we could be subject to
substantial civil and criminal penalties and could be required
to restructure or terminate the applicable contractual
arrangements and our contractual arrangements may be
unenforceable in that particular state. A determination that our
arrangements with physicians violate state statutes, a change in
government regulation, or our inability to successfully
restructure these arrangements to comply with these statutes,
could eliminate business located in certain states from the
market for our services, which would have a material adverse
effect on our business, financial condition and operations.
Our
failure to comply with government regulations, including broad
and complex federal and state fraud and abuse laws, may result
in substantial reimbursement obligations, damages, penalties,
injunctive relief or exclusion from participation in federal or
state healthcare programs.
Our sleep diagnostic, therapy, and supply operations are subject
to a variety of complex federal, state and local government laws
and regulations targeted at fraud and abuse, including:
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The federal Anti-Kickback Statute, which prohibits persons from
knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in cash or in
kind: (i) for referring an individual to a person for the
provision of an item or service for which payment may be made
under federal healthcare programs such as Medicare and Medicaid;
or (ii) to induce a person to refer an individual to a
person for the provision of an item or service covered under a
federal healthcare program, or arrange for or recommend that
someone purchase, lease, or order a good, facility, service, or
item covered under a federal healthcare program;
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State law equivalents to the federal Anti-Kickback Statute,
which may not be limited to government reimbursed items;
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The federal False Claims Act, which prohibits any person from
knowingly presenting, or causing to be presented, a false claim
for payment to the federal government or knowingly making, or
causing to be made, a false statement in order to have a false
claim paid. The federal governments interpretation of the
scope of the law has in recent years grown increasingly broad.
Most states also have statutes or regulations similar to the
federal false claims laws, which apply to items and services
reimbursed under Medicaid and other state programs, or, in
several states, apply regardless of the payor;
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The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, which prohibits fraud on a health benefit plan and
false statements. HIPAA created a federal healthcare fraud
statute that prohibits knowingly and willfully executing a
scheme to defraud any healthcare benefit program, including
private payors. Among other things, HIPAA also imposes criminal
penalties for knowingly and willfully
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falsifying, concealing or covering up a material fact or making
any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare
benefits, items or services, along with theft or embezzlement in
connection with a healthcare benefits program and willful
obstruction of a criminal investigation involving a federal
healthcare offense;
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The Stark Law prohibits the referral of Medicare and Medicaid
designated health services which includes outpatient
prescription drugs and durable medical equipment such as CPAP
devices and may also include sleep diagnostic testing if the
testing is billed by a hospital to Medicare or Medicaid to an
entity if the physician or a member of such physicians
immediate family has a financial relationship with
the entity, unless an exception applies. The Stark Law provides
that the entity that renders the designated health
services may not present or cause to be presented a claim
for designated health services furnished pursuant to
a prohibited referral. A person who engages in a scheme to
circumvent the Stark Laws prohibitions may be fined up to
$100,000 for each applicable arrangement or scheme. In addition,
anyone who presents or causes to be presented a claim in
violation of the Stark Law is subject to payment denials,
mandatory refunds, monetary penalties of up to $15,000 per
service, an assessment of up to three times the amount claimed,
and possible exclusion from participation in federal healthcare
programs; and
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Many state laws prohibit physician referrals to entities with
which the physician has a financial interest, or require that
the physician provide the patient notice of the physicians
financial relationship before making the referral. State law
equivalents to the Stark law may be applicable to different
types of services than those that are designated health
services under the federal law and may have fewer or
different exceptions.
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In addition to those sanctions described above, violations of
these or other government regulations could result in material
penalties, including: civil monetary penalties, suspension of
payments from government programs, loss of required government
certifications, loss of licenses, loss of authorizations to
participate in or exclusion from government reimbursement
programs (including Medicare and Medicaid programs). Also,
violations of federal, state, and common law privacy protections
could give rise to significant damages, penalties, or injunctive
relief. We believe that our practices are not in violation of
the federal anti-kickback statute, false claims laws, HIPAA, the
Stark law, or state equivalents, but we cannot assure you that
enforcement authorities will not take action against us and, if
such action were successful, we could be required to pay
significant fines and penalties and change our corporate
practices. Such enforcement could have a significant adverse
effect on our ability to operate our business and to enforce our
contracts with payors and others.
Non-compliance
with federal and state anti-kickback laws could affect our
business, operations or financial condition.
Various federal and state laws govern financial arrangements
among healthcare providers. The federal Anti-Kickback Statute
prohibits the knowing and willful offer, payment, solicitation
or receipt of any form of remuneration in return for, or with
the purpose to induce, the referral of Medicare, Medicaid or
other federal healthcare program patients, or in return for, or
with the purpose to induce, the purchase, lease or order of
items or services that are covered by Medicare, Medicaid or
other federal healthcare programs. Similarly, many state laws
prohibit the solicitation, payment or receipt of remuneration in
return for, or to induce, the referral of patients in private as
well as government programs. There is a risk that an investment
in our shares or in our subsidiary sleep centers by our
affiliated physicians, including the distribution of any profits
to our affiliated physicians, referrals for sleep testing or
treatment services by physicians who own our securities, the
marketing of our affiliated physicians services or our
compensation arrangements with our affiliated physicians may be
considered a violation of these laws. Violation of these
anti-kickback laws may result in substantial civil or criminal
penalties for individuals or entities
and/or
exclusion from participating in federal or state healthcare
programs. If we are excluded from federal or state healthcare
programs, our affiliated physicians who participate in those
programs would not be permitted to continue doing business with
us. We believe that we are operating in compliance with
applicable laws and believe that our arrangements with
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providers would not be found to violate the anti-kickback laws.
However, these laws could be interpreted in a manner
inconsistent with our operations.
We have physicians who own non-controlling investment interests
in some of our sleep diagnostic testing facilities who also have
a referral relationship with our sleep testing or care
management services. If the ownership distributions paid to
physicians by our testing facilities are found to constitute
prohibited payments made to physicians under the federal
Anti-kickback Statute, physician self-referral or other fraud
and abuse laws, our business may be adversely affected. Over the
years, the federal government has published regulations that
established safe harbors to the federal
Anti-Kickback Statute. An arrangement that meets all of the
elements of the safe harbor is immunized from prosecution under
the federal Anti-Kickback Statute. The failure to satisfy all
elements, however, does not necessarily mean the arrangement
violates the federal Anti-Kickback Statute. We endeavor to meet
safe harbors designed for small entity investments and believe
we are in compliance with such laws. However, if we were found
to be violation of a federal or state anti-kickback statute, our
business, results of operations, and financial condition would
be harmed and we would be subject to substantial civil and
criminal penalties.
If
government laws or regulations change or the enforcement or
interpretation of them change, we may be obligated to purchase
some or all of the ownership interests of the physicians
associated with us.
Changes in government regulation or changes in the enforcement
or interpretation of existing laws or regulations could obligate
us to purchase at the then fair market value some or all of the
ownership interests of the physicians who have invested in our
sleep diagnostic facilities. Regulatory changes that could
create this obligation include changes that:
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make illegal the referral of Medicare or other patients to our
sleep diagnostic facilities by physicians affiliated with us,
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create the substantial likelihood that cash distributions from
our sleep diagnostic facilities to our physician partners will
be illegal, or
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make illegal the ownership by physicians of their interests in
our sleep diagnostic facilities.
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From time to time, we may voluntarily seek to increase our
ownership interest in one or more of our sleep diagnostic
testing facilities, in accordance with any applicable
limitations. We may seek to use shares of our common stock to
purchase physicians ownership interests instead of cash.
If the use of our stock is not permitted or attractive to us or
the physicians, we may use cash or promissory notes to purchase
the physicians ownership interests. Our existing capital
resources may not be sufficient for the acquisition or the use
of cash may limit our ability to use our capital resources
elsewhere, limiting our growth and impairing our operations. The
creation of these obligations and the possible adverse effect on
our affiliation with these physicians could have a material
adverse effect on us.
Federal
or state self-referral regulations could impact our arrangements
with our affiliated physicians.
The federal physician self-referral statute, known as the
Stark statute, prohibits a physician from making a
referral for certain designated health services, including DME
such as CPAP devices, to any entity with which the physician has
a financial relationship, unless there is an exception in the
statute that allows the referral. The entity that receives a
prohibited referral from a physician may not submit a bill to
Medicare for that service. Many state laws prohibit physician
referrals to entities in which the physician has a financial
interest, or require that the physician provide the patient
notice of the physicians financial relationship before
making the referral. There is a risk that an investment in our
shares or in our subsidiary sleep centers by our affiliated
physicians, including the distribution of any profits to our
affiliated physicians, the use of our equipment by physicians
who own our securities, any assistance from healthcare providers
in acquiring, maintaining or operating sleep diagnostic testing
equipment, the marketing of our affiliated physicians
services or our compensation arrangements with our affiliated
physicians, could be interpreted as a violation of the federal
Stark statute or similar state laws, if we were to accept
referrals from our affiliated physicians. Violation of the Stark
statute can result in substantial civil penalties for both the
referring physician and any
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entity that submits a claim for a healthcare service made
pursuant to a prohibited referral. In addition, federal courts
have ruled that violations of the Stark statute can be the basis
for a legal claim under the Federal False Claims Act. We believe
that all of our affiliated physician arrangements are in
compliance with the Stark statute. However, these laws could be
interpreted in a manner inconsistent with our operations.
Because
we submit claims to the Medicare program based on the services
we provide, it is possible that a lawsuit could be brought
against us under the Federal False Claims Act, and the outcome
of any such lawsuit could have a material adverse effect on our
business, financial condition and results of
operations.
The federal False Claims Act provides, in part, that the federal
government may bring a lawsuit against any person whom it
believes has knowingly presented, or caused to be presented, a
false or fraudulent request for payment from the federal
government, or who has made a false statement or used a false
record to have a claim approved. Federal courts have ruled that
a violation of the anti-kickback provision of the Stark statute
can serve as the basis for the federal False Claims Act suit.
The federal False Claims Act further provides that a lawsuit
brought under that act may be initiated in the name of the
United States by an individual who was the original source of
the allegations, known as the relator. Actions brought under the
federal False Claims Act are sealed by the court at the time of
filing. The only parties privy to the information contained in
the complaint are the relator, the federal government and the
court. Therefore, it is possible that lawsuits have been filed
against us that we are unaware of or which we have been ordered
by the court not to discuss until the court lifts the seal from
the case. Penalties include fines ranging from $5,500 to $11,000
for each false claim, plus three times the amount of damages
that the federal government sustained because of the act of the
violator.
We believe that we are operating in compliance with the Medicare
rules and regulations and, thus, the federal False Claims Act.
However, if we were found to have violated certain rules and
regulations and, as a result, submitted or caused our affiliated
physicians to submit allegedly false claims, any sanctions
imposed under the federal False Claims Act could result in
substantial fines and penalties or exclusion from participation
in federal and state healthcare programs, which could have a
material adverse effect on our business and financial condition.
If we are excluded from participation in federal or state
healthcare programs, our affiliated physicians who participate
in those programs could not do business with us.
Federal regulatory and law enforcement authorities have recently
increased enforcement activities with respect to Medicare and
Medicaid fraud and abuse regulations and other reimbursement
laws and regulations, including laws and regulations that govern
our activities and the activities of providers of sleep
diagnostic testing and durable medical equipment. These
increased enforcement activities may have a direct or indirect
adverse affect on our business, financial condition and results
of operations.
Additionally, some state statutes contain prohibitions similar
to and possibly even more restrictive than the federal False
Claims Act. These state laws may also empower state
administrators to adopt regulations restricting financial
relationships or payment arrangements involving healthcare
providers under which a person benefits financially by referring
a patient to another person. We believe that we are operating in
compliance with these laws. However, if we are found to have
violated such laws, our business, results of operations and
financial condition would be harmed.
Future
changes in healthcare regulation are difficult to predict and
may constrain or require us to restructure our operations, which
could negatively impact our business and operating
results.
The healthcare industry is heavily regulated and subject to
frequent changes in governing laws and regulations as well as to
evolving administrative interpretations. Our business could be
adversely affected by regulatory changes at the federal or state
level that impose new requirements for licensing, new
restrictions on reimbursement for medical services by government
programs, new pretreatment certification requirements for
patients seeking sleep testing procedures or treatment products,
or new limitations on services that can be performed by us. In
addition, federal, state and local legislative bodies have
adopted and continue to consider medical cost-containment
legislation and regulations that have restricted or may restrict
reimbursement to
19
entities providing services in the healthcare industry and
referrals by physicians to entities in which the physicians have
a direct or indirect financial interest or other relationship.
For example, Medicare recently adopted a regulation that limits
the technical component of the reimbursement for multiple
diagnostic tests performed during a single session at medical
facilities other than hospitals. Any of these or future
reimbursement regulations or policies could limit the number of
diagnostic tests ordered and could have a material adverse
effect on our business.
The Center for Medicare & Medicaid Services, or CMS,
recently finalized certain anti-markup rules relating to
diagnostic tests paid for by the Medicare program. The
anti-markup rules are generally applicable where a physician or
other supplier bills for the technical component or professional
component of a diagnostic test that was ordered by the physician
or other supplier (or ordered by a party related to such
physician or other supplier through common ownership or
control), and the diagnostic test is performed by a physician
who does not share a practice with the billing physician or
other supplier. If the anti-markup rule applies to an
interpretation, then the reimbursement provided by Medicare to a
billing physician or other supplier for that interpretation may
be limited. Because our sleep diagnostic testing facilities bill
Medicare for the technical and professional fees of sleep
diagnostic tests that are ordered by community physicians or our
affiliated physicians, we believe that the anti-markup rule does
not apply to the professional services our affiliated physicians
perform or the technical services that our sleep diagnostic
testing facilities perform. However, this rule could be subject
to an interpretation that affects the amounts that may be
reimbursed by Medicare for professional diagnostic
interpretations.
Although we monitor legal and regulatory developments and modify
our operations from time to time as the regulatory environment
changes, we may not be able to adapt our operations to address
every new regulation, and such regulations may adversely affect
our business. In addition, although we believe that we are
operating in compliance with applicable federal and state laws,
our business operations have not been scrutinized or assessed by
judicial or regulatory agencies. We cannot assure you that a
review of our business by courts or regulatory authorities would
not result in a determination that adversely affects our
operations or that the healthcare regulatory environment will
not change in a way that will restrict our operations.
Non-compliance
with state and federal regulations concerning health information
practices may adversely affect our business, financial condition
or operations, and the cost of compliance may be
material.
We collect and use information about individuals and their
medical conditions. Numerous federal and state laws and
regulations, including the federal Health Insurance Portability
and Accountability Act of 1996 (HIPAA) and the
Health Information Technology For Economic and Clinical Health
Act (HITECH Act), govern the collection,
dissemination, security, use and confidentiality of such
patient-identifiable health information. HIPAA sets forth
standards for electronic transactions between health plans,
providers and clearinghouses; unique provider, employer, health
plan and patient identifiers; security and electronic signatures
as well as privacy protections relating to the exchange of
individually identifiable health information. The Department of
Health and Human Services (DHHS) has released
several rules mandating compliance with the standards set forth
under HIPAA. We believe our sleep centers and sleep related
products and services achieved compliance with DHHSs
standards governing the privacy of individually identifiable
health information and DHHSs standards governing the
security of electronically stored health information. In
addition, we have fully implemented the required uniform
standards governing common healthcare transactions. Finally, we
have taken or will take all necessary steps to achieve
compliance with other HIPAA rules as applicable, including the
standard unique employer identifier rule, the standard health
care provider identifier rule and the enforcement rule. While it
is believed that we currently comply with HIPAA, there is some
uncertainty of the extent to which the enforcement or
interpretation of the HIPAA regulations will affect our
business. Continuing compliance and the associated costs with
these regulations may have a significant impact on our business
operations. Criminal and civil sanctions may be imposed for
failing to comply with HIPAA.
In addition to the HIPAA restrictions relating to the exchange
of healthcare information, individual states have adopted laws
protecting the confidentiality of patient information which
impact the manner in which patient records are maintained.
Violation of patient confidentiality rights under common law,
state or federal law could give rise to damages, penalties,
civil or criminal fines
and/or
injunctive relief. We believe that our sleep center
20
operations are in compliance with federal and state privacy
protections. However, an enforcement agency or court may find a
violation of state or federal privacy protections arising from
our sleep center operations.
The
failure to comply with other provisions of HIPAA potentially
could result in liability, civil and criminal penalties, and
could have a material adverse effect on our business and
financial condition.
HIPAA authorizes the imposition of civil money penalties against
entities that employ or enter into contracts with individuals or
entities who have been excluded from participation in the
Medicare or Medicaid programs. We perform background checks on
our affiliated physicians, and we do not believe that we engage
or contract with any excluded individuals or entities. However,
a finding that we have violated this provision of HIPAA could
have a material adverse effect on our business and financial
condition.
HIPAA also establishes several separate criminal penalties for
making false or fraudulent claims to insurance companies and
other non-governmental payors of healthcare services. These
provisions are intended to punish some of the same conduct in
the submission of claims to private payors as the federal False
Claims Act covers in connection with governmental health
programs. We believe that our services have not historically
been provided in a way that would place either our clients or
ourselves at risk of violating the HIPAA anti-fraud statutes,
including those in which we received direct reimbursement
because of the reassignment by affiliated physicians to us or
those in which we may be considered to receive an indirect
reimbursement because of the reassignment by us to hospitals of
the right to collect for professional interpretations and
technical services.
We believe that our sleep centers have taken all appropriate
steps to achieve compliance with the HIPAA requirements. We do
not currently believe that the ongoing cost of compliance with
the existing HIPAA requirements will be material to our
operations; however, we cannot predict the cost of future
compliance with HIPAA requirements.
Our
failure to successfully implement our growth plan may adversely
affect our financial performance.
We have grown primarily through acquisitions. We intend to
continue to grow incrementally through acquisitions with our
current focus primarily on the sleep disorder market through our
comprehensive sleep management care model. As this growth plan
is pursued, we may encounter difficulties expanding and
improving our operating and financial systems to maintain pace
with the increased complexity of the expanded operations and
management responsibilities.
The success of our growth strategy will also depend on a number
of other factors, including:
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economic conditions;
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competition;
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consumer preferences and purchasing power;
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the ability to attract and retain sleep technicians and
physicians;
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financing and working capital requirements;
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the ability to negotiate sleep center leases on favorable
terms; and
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the availability of new locations at a reasonable cost.
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Even if we succeed in acquiring established sleep centers as
planned, those acquired facilities may not achieve the projected
revenue or profitability levels comparable to those of currently
owned sleep centers in the time periods we estimate or at all.
Moreover, our newly acquired sleep centers may reduce the
revenues and profitability of our existing locations and other
operations. The failure of our growth strategy may have a
material adverse effect on our operating results and financial
condition.
21
We
identified a material weakness in the design and operation of
our internal controls over financial reporting as of
December 31, 2008. Although we have completed a remediation
for the material weakness, there can be no assurance that such
controls will effectively prevent material misstatements in our
financial statements in future periods.
In connection with the preparation of our financial statements
for the fiscal quarter ended on December 31, 2008, we
reported to the Audit Committee of our Board of Directors that
certain significant deficiencies in internal controls over
financial reporting existed at December 31, 2008 that, when
evaluated in the aggregate, we concluded to be a material
weakness in the design and operation of internal control over
financial reporting at December 31, 2008. Therefore, we
have concluded that, as of December 31, 2008, the
Companys internal control over financial reporting was not
effective.
A material weakness is a deficiency, or a combination of control
deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
The material weakness identified as of December 31, 2008,
related to the net realizable value of the accounts receivable
for our SMS operating segment. Our accounts receivable are
subject to an adjustment based on the difference between the
allowance we recorded for expected realizable amount and the
actual realized amount. In performing the 2008 fourth quarter
evaluation of the net realizable value of accounts receivable,
we discovered that our realizable accounts receivable, and
accordingly our 2008 revenues, should have been recorded net of
an additional $735,000 to more closely reflect collectability of
accounts receivable and to net that amount against revenue. In
addition to contractual allowance adjustment of $735,000, we
recorded an additional allowance for bad debts of approximately
$916,000 due to changes in the factors used to estimate the
ultimate contractual allowances incurred from third-party
insurance companies.
During the 2009 second quarter, we completed our remediation of
the accounts receivable issue by enhancing the procedures used
to analyze and estimate the contractual allowances and bad debts
incurred on our SMS revenue. During our remediation process, we
identified new information related to the allowance for doubtful
accounts that led to a change in our estimate for the allowance
in the amount of approximately $2.6 million. While we
believe that these new controls and processes have remediated
the material weakness, there can be no assurance that such
controls will effectively prevent material misstatements in the
net realizable value of our accounts receivable in future
periods.
In addition, during the three months ended December 31,
2008, we recognized certain control and reporting material
weaknesses related to our oversight of the financial reporting
process in our SMS segment. The material weakness included a
combination of control deficiencies we identified with respect
to the audit adjustments proposed during the audit of our
financial statements. None of the adjustments or control
deficiencies were deemed material on an individual basis, but we
deemed the control deficiencies to be material in the aggregate.
The control deficiencies identified included the process to
approve journal entries and the process to ensure that all
accounts are reviewed and reconciled where appropriate.
To remedy this material weakness, we enacted additional review
and approval controls over financial reporting, including the
review and approval of all significant journal entries,
reconciliation of all significant accounts. While we believe
that these new controls and processes have remediated the
material weakness, there can be no assurance that such controls
will effectively prevent material misstatements in our
consolidated financial statements in future periods.
Material
weaknesses in the design and operation of the internal controls
over financial reporting of companies that we acquire could have
a material adverse effect on our financial
statements.
Our business has primarily grown through the acquisition of
existing businesses and in the future we intend to continue to
grow our SMS business through the acquisition of existing
businesses. When we acquire such existing businesses our due
diligence may fail to discover defects or deficiencies in the
design and operations of the internal controls over financial
reporting of such companies, or defects or deficiencies in the
internal controls over financial reporting may arise when we try
to integrate the operations of these newly
22
acquired businesses with our own. We can provide no assurances
that we will not experience such issues in future acquisitions,
the result of which could have a material adverse effect on our
financial statements.
The
goodwill acquired pursuant to our acquisitions of sleep centers
may become impaired and require a write-down and the recognition
of a substantial impairment expense.
At September 30, 2010, we had approximately
$20.5 million in goodwill that was recorded in connection
with the acquisitions of our sleep centers during the years 2007
through September 30, 2009. We periodically evaluate
whether or not to take an impairment charge on our goodwill, as
required by the applicable accounting literature, and such
evaluations have not resulted in an impairment charge to date.
In the event that this goodwill is determined to be impaired for
any reason, we will be required to write-down or reduce the
value of the goodwill and recognize an impairment expense. The
impairment expense may be substantial in amount and, in which
case, adversely affect the results of our operations for the
applicable period and may negatively affect the market value of
our common stock.
Risks
Related to Ownership of Our Common Stock
Our
current principal stockholders will continue to have significant
influence over us after this offering, and they could delay,
deter or prevent a change of control or other business
combination or otherwise cause us to take action with which you
might not agree.
Upon completion of this offering, our executive officers,
directors and holders of greater than 5% of our outstanding
common stock will together beneficially own approximately 47% of
our outstanding common stock, or approximately 44% if the
underwriters exercise their over-allotment option in full. As a
result, our executive officers, directors and holders of greater
than 5% of our outstanding common stock will have the ability to
significantly influence all matters submitted to our
stockholders for approval, including:
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changes to the composition of our Board of Directors, which has
the authority to direct our business and appoint and remove our
officers;
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proposed mergers, consolidations or other business
combinations; and
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amendments to our certificate of incorporation and bylaws which
govern the rights attached to our shares of common stock.
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This concentration of ownership of shares of our common stock
could delay or prevent proxy contests, mergers, tender offers,
open-market purchase programs or other purchases of shares of
our common stock that might otherwise give you the opportunity
to realize a premium over the then-prevailing market price of
our common stock. The interests of our executive officers,
directors and holders of greater than 5% of our outstanding
common stock may not always coincide with the interests of the
other holders of our common stock. This concentration of
ownership may also adversely affect our stock price.
The
market price of our common stock may be volatile and this may
adversely affect our stockholders.
The price at which our common stock trades may be volatile. The
stock market has recently experienced significant price and
volume fluctuations that have affected the market prices of
securities, including securities of healthcare companies. The
market price of our common stock may be influenced by many
factors, including:
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our operating and financial performance;
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variances in our quarterly financial results compared to
expectations;
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the depth and liquidity of the market for our common stock;
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future sales of common stock or the perception that sales could
occur;
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investor perception of our business and our prospects;
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developments relating to litigation or governmental
investigations;
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23
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changes or proposed changes in healthcare laws or regulations or
enforcement of these laws and regulations, or announcements
relating to these matters; or
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general economic and stock market conditions.
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In addition, the stock market in general has experienced price
and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of healthcare
companies. These broad market and industry factors may
materially reduce the market price of our common stock,
regardless of our operating performance. In the past, securities
class-action
litigation has often been brought against companies following
periods of volatility in the market price of their respective
securities. We may become involved in this type of litigation in
the future. Litigation of this type is often expensive to defend
and may divert our management teams attention as well as
resources from the operation of our business.
We do
not anticipate paying dividends on our common stock in the
foreseeable future and, consequently, your ability to achieve a
return on your investment will depend solely on appreciation in
the price of our common stock.
We do not pay dividends on our shares of common stock and intend
to retain all future earnings to finance the continued growth
and development of our business and for general corporate
purposes. In addition, we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Any
future payment of cash dividends will depend upon our financial
condition, capital requirements, earnings and other factors
deemed relevant by our Board of Directors. Our current credit
facility with Arvest Bank restricts our ability to pay
dividends, see Managements Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources Arvest Credit
Facility.
We
have broad discretion in how we use the net proceeds of this
offering, and we may not use these proceeds effectively or in
ways with which you agree.
Our management will have broad discretion as to the application
of the net proceeds of this offering and could use them for
purposes other than those contemplated at the time of this
offering. Our stockholders may not agree with the manner in
which our management chooses to allocate and spend the net
proceeds. Moreover, our management may use the net proceeds for
corporate purposes that may not yield profitable results or
increase the market price of our common stock.
24
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus and the documents
incorporated by reference may constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking
statements are based upon our current assumptions, expectations
and beliefs concerning future developments and their potential
effect on our business. In some cases, you can identify
forward-looking statements by the following words:
may, will, could,
would, should, expect,
intend, plan, anticipate,
believe, approximately,
estimate, predict, project,
potential, continue,
ongoing, or the negative of these terms or other
comparable terminology, although the absence of these words does
not necessarily mean that a statement is not forward-looking. We
believe that the statements in this prospectus and the documents
incorporated by reference that we make regarding the following
subject matters are forward-looking by their nature:
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our clinical approach and its impact on patient compliance and
federal and third-party payor reimbursement rates;
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our on-going care management and re-supply program;
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our ability to retain or attract new customers in the
increasingly competitive sleep diagnostic and care management;
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our expectations regarding growth strategies in our sleep
management solutions business;
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our predictions of opportunities in our sleep management
solutions business;
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our ability to generate sufficient cash flow to service our debt
and lease obligations;
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our ability to realize our future growth plans, attract
qualified physicians and medical personnel, and engage in
additional sleep center acquisitions;
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reimbursement rates from federal and third-party payors for our
sleep disorder related products and services;
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inventory and operation costs;
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our competitors, market pressures, and our assessment of our
ability to compete favorably;
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plans to increase labor efficiency;
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costs associated with remaining in compliance with government
regulations and laws;
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our ability to remain in compliance with government regulations
and laws and the consequences if we are found in violation of
any of these regulations or laws;
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Medicaid, Medicare and other third-party payor reimbursement
policies;
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the effect of current and anticipated domestic legislation on
our business;
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the accreditation of our centers;
the assumptions used in the preparation of our financial
statements and any pro forma adjustments;
financial projections;
sleep study trends; and
net proceeds and expenses of this offering.
The preceding list is not intended to be an exhaustive list of
all of our forward-looking statements. Although the
forward-looking statements in this prospectus reflect our good
faith judgment, based on currently available information, they
involve known and unknown risks, uncertainties and other factors
that may cause our actual results or our industries actual
results, levels of activity, performance, or achievements to be
materially different from any future results, levels of
activity, performance, or achievements expressed or implied by
these forward-looking statements. Factors that might cause or
contribute to such differences
25
include, but are not limited to, those discussed in Risk
Factors contained in this prospectus or the documents
incorporated by reference. As a result of these factors, we
cannot assure you that the forward-looking statements in this
prospectus will prove to be accurate. Except as required by law,
we undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this
prospectus, to conform these statements to actual results, or to
changes in our expectations. You should, however, review the
factors and risks we describe in the reports we will file from
time to time with the SEC after the date of this prospectus.
USE OF
PROCEEDS
We estimate that the net proceeds from this offering will be
approximately $13.7 million (or approximately
$15.8 million if the underwriters exercise their
overallotment in full) after deducting the underwriting
discounts and commissions and estimated offering expenses.
We currently intend to use the estimated net proceeds from the
sale of these securities to repay approximately
$5.0 million of our credit facility with the remainder to
fund potential acquisitions of sleep diagnostic therapy and
supply businesses, although no such acquisitions have currently
been identified, for working capital and other general corporate
purposes. While we have not identified any specific acquisitions
at this time, we believe opportunities may exist from time to
time to expand our current sleep diagnostic therapy and supply
businesses through acquisitions of other companies or
businesses. We have not yet determined the amount of net
proceeds to be used specifically for any of the foregoing
purposes. Accordingly, our management will have significant
discretion and flexibility in applying the net proceeds from the
sale of these securities. Pending any use, as described above,
we intend to invest the net proceeds in short- and
intermediate-term interest-bearing obligations, investment-grade
instruments, certificates of deposit or direct or guaranteed
obligations of the U.S. government.
The Arvest Bank credit facility is comprised of a
$30.0 million Term Loan and a $15.0 million
Acquisition Line. We expect that our expected payment of
approximately $5.0 from the proceeds of this offering will be
applied against the Term Loan. The Term Loan will become due on
May 21, 2014. The outstanding principal amounts of Term
Loan bear interest at the greater of the prime rate as reported
in the Money Rates section of The Wall Street
Journal (the WSJ Prime Rate) or 6% (Floor
Rate). The WSJ Prime Rate is adjusted annually, subject to
the Floor Rate, then in effect on May 21 of each year of the
Term Loan. In the event of our default under the terms of the
Arvest Bank credit facility, the outstanding principal will bear
interest at the per annum rate equal to the greater of 15% or
the WSJ Prime Rate plus 5%. Provided we are not in default, the
Term Note is payable in quarterly payments of accrued and unpaid
interest on each September 1, December 1,
March 1, and June 1. Commencing on September 1,
2011, and quarterly thereafter on each December 1,
March 1, June 1 and September 1, we are obligated to
make equal payments of principal and interest calculated on a
seven-year amortization of the unpaid principal balance of the
Term Note as of June 1, 2011 at the then current WSJ Prime
Rate or Floor Rate, and adjusted annually thereafter for any
changes to the WSJ Prime Rate or Floor Rate as provided herein.
The entire unpaid principal balance of the Term Note plus all
accrued and unpaid interest thereon will be due and payable on
May 21, 2014.
DIVIDEND
POLICY
Historically, we have not paid dividends on our common stock,
and we currently do not intend to pay any dividends on our
common stock after the completion of this offering. We currently
plan to retain any earnings to support the operation, and to
finance the growth, of our business rather than to pay cash
dividends. Payments of any cash dividends in the future will
depend on our financial condition, results of operations and
capital requirements as well as other factors deemed relevant by
our Board of Directors. Our existing credit facility restricts
our ability to pay dividends without the approval of our
lenders. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources.
26
MARKET
PRICE OF COMMON STOCK AND OTHER RELATED MATTERS
Reverse
Split
On March 13, 2008, our Board of Directors approved a
reverse split of our common stock at a ratio of
one-for-five
shares. The effective date of the reverse split was set as
April 11, 2008.
Market
Our common stock is listed on the Nasdaq Capital Market
(Nasdaq) under the symbol GRMH. The closing sale
prices reflect inter-dealer prices without adjustment for retail
markups, markdowns or commissions and may not reflect actual
transactions. The following table sets forth the high and low
sale prices of our common stock during the calendar quarters
presented as reported by the Nasdaq and OTC Bulletin Board
for the periods prior to our listing on Nasdaq. Our common stock
started trading on Nasdaq on September 10, 2008. Prices
prior to our reverse split in April 2008 have been adjusted to
give effect to the
one-for-five
reverse stock split.
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High
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Low
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2010
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Fourth Quarter (through December 29, 2010)
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$
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1.50
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$
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0.70
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Third Quarter
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$
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1.34
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$
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1.09
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Second Quarter
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$
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1.52
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$
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1.00
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First Quarter
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$
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1.84
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$
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1.06
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2009
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Fourth Quarter
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$
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2.95
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$
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1.75
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Third Quarter
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$
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3.50
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$
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1.40
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Second Quarter
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$
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2.85
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$
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1.50
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First Quarter
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$
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2.89
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$
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1.30
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2008
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Fourth Quarter
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$
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4.91
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$
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1.25
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Third Quarter
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$
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8.00
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$
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3.90
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Second Quarter
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$
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9.00
|
|
|
$
|
3.90
|
|
First Quarter
|
|
$
|
5.25
|
|
|
$
|
3.00
|
|
2007
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
3.75
|
|
|
$
|
1.35
|
|
Third Quarter
|
|
$
|
2.25
|
|
|
$
|
1.25
|
|
Second Quarter
|
|
$
|
3.45
|
|
|
$
|
1.35
|
|
First Quarter
|
|
$
|
2.25
|
|
|
$
|
1.10
|
|
On December 29, 2010, the closing price of our common stock
as quoted on Nasdaq was $0.70.
The market price of our common stock is subject to significant
fluctuations in response to, and may be adversely affected by:
|
|
|
|
|
variations in quarterly operating results;
|
|
|
|
|
|
changes in earnings estimates by analysts;
|
|
|
|
|
|
developments in the sleep disorder diagnostic and treatment
markets;
|
|
|
|
|
|
announcements and introductions of product or service
innovations; and
|
|
|
|
|
|
general stock market conditions.
|
Holders
of Equity Securities
As of December 15, 2010, we had approximately 622 owners of
our common stock shares, which consisted of 120 record owners
and approximately 522 owners in street name.
27
CAPITALIZATION
The following table sets forth, as of September 30, 2010,
our cash and cash equivalents, long-term debt and our unaudited
capitalization on an actual basis and on an as adjusted basis to
give effect to this offering and the application of the net
proceeds of this offering, as described under Use of
Proceeds.
You should read this table in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and other financial
information included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash and cash equivalents
|
|
$
|
533,770
|
|
|
$
|
9,237,770
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$
|
22,417,026
|
|
|
$
|
17,417,026
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
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; 28,974,884 issued and outstanding at
September 30, 2010
|
|
|
2,898
|
|
|
|
4,398
|
|
Paid-in capital
|
|
|
29,446,757
|
|
|
|
43,149,257
|
|
Accumulated deficit
|
|
|
(15,416,999
|
)
|
|
|
(15,416,999
|
)
|
|
|
|
|
|
|
|
|
|
Total Graymark Healthcare shareholders equity
|
|
|
14,032,656
|
|
|
|
27,736,656
|
|
Noncontrolling interest
|
|
|
(27,440
|
)
|
|
|
(27,440
|
)
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
14,005,216
|
|
|
$
|
27,709,216
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization
|
|
$
|
37,328,294
|
|
|
$
|
54,364,012
|
|
|
|
|
|
|
|
|
|
|
28
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated statement of operations data for the
period from July 1, 2006 (inception) to December 31,
2006 and for the fiscal year ended December 31, 2007 and
the balance sheet data as of December 31, 2006 and 2007 are
derived from our audited consolidated financial statements which
are not incorporated by reference or included in this
prospectus. The summary statement of operations data for the
fiscal years ended December 31, 2008 and 2009 and balance
sheet data as of December 31, 2008 and 2009 have been
derived from our audited consolidated financial statements and
related notes, which are incorporated by reference into this
prospectus, and have been audited by Eide Bailly LLP. The
selected financial data set forth below should be read in
conjunction with our financial statements and the related notes
which have been incorporated herein by reference and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus. The historical results are not necessarily
indicative of the results to be expected for any future period.
The selected consolidated statement of operations data for the
nine months ended September 30, 2009 and 2010 and our
historical results on a pro forma basis adjusted for our
acquisitions of Somni and Eastern for the years ended
December 31, 2008 and 2009 and the selected consolidated
balance sheet data as of September 30, 2010 have been
derived from our unaudited consolidated financial statements
that have been incorporated by reference into this prospectus.
Our unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and notes thereto, which include, in the opinion of
our management, all adjustments (consisting of normal recurring
adjustments), necessary for a fair statement of the information
for the unaudited interim period. Our historical results for any
prior or interim period are not necessarily indicative of
results to be expected for a full fiscal year or for any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
Unaudited
|
|
|
|
Actual for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
to
|
|
|
Actual For Years Ended
|
|
|
Actual for Nine Months
|
|
|
Years Ended
|
|
|
|
December 31
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
9,553,230
|
|
|
$
|
15,292,164
|
|
|
$
|
17,571,539
|
|
|
$
|
11,449,888
|
|
|
$
|
17,497,513
|
|
|
$
|
27,441,366
|
|
|
$
|
25,846,789
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
|
|
|
|
|
3,633,929
|
|
|
|
5,779,918
|
|
|
|
7,735,085
|
|
|
|
3,512,272
|
|
|
|
5,337,228
|
|
|
|
9,959,992
|
|
|
|
10,495,459
|
|
Selling, general and administrative
|
|
|
|
|
|
|
3,398,931
|
|
|
|
7,726,693
|
|
|
|
12,501,994
|
|
|
|
11,934,515
|
|
|
|
14,197,288
|
|
|
|
13,381,041
|
|
|
|
16,603,651
|
|
Change in accounting estimate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,648,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,648,207
|
|
Impairment of goodwill
|
|
|
|
|
|
|
204,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
762,224
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
313,874
|
|
|
|
598,627
|
|
|
|
1,074,132
|
|
|
|
761,758
|
|
|
|
1,040,891
|
|
|
|
1,160,562
|
|
|
|
1,469,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,550,734
|
|
|
|
14,105,238
|
|
|
|
23,959,418
|
|
|
|
16,208,545
|
|
|
|
21,337,631
|
|
|
|
24,501,595
|
|
|
|
31,216,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
|
|
|
|
(935,874
|
)
|
|
|
(696,181
|
)
|
|
|
(952,724
|
)
|
|
|
(616,380
|
)
|
|
|
(919,280
|
)
|
|
|
(857,396
|
)
|
|
|
(1,108,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
Unaudited
|
|
|
|
Actual for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
to
|
|
|
Actual For Years Ended
|
|
|
Actual for Nine Months
|
|
|
Years Ended
|
|
|
|
December 31
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
|
|
|
|
1,066,622
|
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(5,375,037
|
)
|
|
|
(4,759,398
|
)
|
|
|
2,082,375
|
|
|
|
(6,477,845
|
)
|
Benefit (provision) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,000
|
|
|
|
(47,192
|
)
|
|
|
(636,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
|
|
|
|
1,066,622
|
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(5,167,037
|
)
|
|
|
4,806,590
|
)
|
|
|
1,445,723
|
|
|
|
(6,477,845
|
)
|
Income (loss) from discontinued operations, net of taxes
|
|
|
(269,444
|
)
|
|
|
(5,558,289
|
)
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
1,279,707
|
|
|
|
(623,399
|
)
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
(269,444
|
)
|
|
|
(4,491,667
|
)
|
|
|
1,297,368
|
|
|
|
(5,341,702
|
)
|
|
|
(3,887,330
|
)
|
|
|
(5,429,989
|
)
|
|
|
2,252,346
|
|
|
|
(4,478,944
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
|
664,862
|
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
(241,768
|
)
|
|
|
(95,961
|
)
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) attributable to Graymark Healthcare
|
|
$
|
(269,444
|
)
|
|
$
|
(5,156,529
|
)
|
|
$
|
744,398
|
|
|
$
|
(5,187,896
|
)
|
|
$
|
(3,645,562
|
)
|
|
$
|
(5,334,028
|
)
|
|
$
|
1,699,376
|
|
|
$
|
(4,325,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to
Graymark Healthcare
|
|
$
|
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.22
|
)
|
Net income (loss) from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.27
|
)
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
0.05
|
|
|
|
(0.02
|
)
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
20,400,000
|
|
|
|
20,404,905
|
|
|
|
25,885,628
|
|
|
|
28,414,508
|
|
|
|
28,116,089
|
|
|
|
28,991,304
|
|
|
|
26,638,423
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding assuming dilution
|
|
|
20,400,000
|
|
|
|
20,404,905
|
|
|
|
26,102,841
|
|
|
|
28,414,508
|
|
|
|
28,116,089
|
|
|
|
28,991,304
|
|
|
|
26,855,636
|
|
|
|
28,942,496
|
|
30
The summary consolidated balance sheet data as of
December 31, 2006, 2007, 2008 and 2009 and
September 30, 2010 is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Audited
|
|
As of
|
|
|
As of December 31,
|
|
September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
958,982
|
|
|
$
|
13,728,534
|
|
|
$
|
1,093,645
|
|
|
$
|
533,770
|
|
Working capital
|
|
|
|
|
|
|
(10,354,661
|
)
|
|
|
22,342,608
|
|
|
|
11,686,156
|
|
|
|
7,114,477
|
|
Total assets from discontinued operations
|
|
|
8,894,582
|
|
|
|
21,583,680
|
|
|
|
39,944,929
|
|
|
|
37,399,351
|
|
|
|
36,367,733
|
|
Total assets
|
|
|
8,894,582
|
|
|
|
41,132,637
|
|
|
|
81,333,630
|
|
|
|
75,867,277
|
|
|
|
72,175,108
|
|
Short term debt
|
|
|
|
|
|
|
13,993,015
|
|
|
|
565,190
|
|
|
|
195,816
|
|
|
|
|
|
Long-term debt, including current portion
|
|
|
|
|
|
|
13,579,620
|
|
|
|
18,088,595
|
|
|
|
22,696,076
|
|
|
|
22,417,026
|
|
Total liabilities from discontinued operations
|
|
|
9,163,026
|
|
|
|
10,078,598
|
|
|
|
38,409,854
|
|
|
|
31,584,726
|
|
|
|
33,625,516
|
|
Accumulated deficit
|
|
|
(269,444
|
)
|
|
|
(5,425,973
|
)
|
|
|
(4,681,575
|
)
|
|
|
(9,869,471
|
)
|
|
|
(15,416,999
|
)
|
Total stockholders (deficit) equity(1)
|
|
|
(268,444
|
)
|
|
|
2,492,798
|
|
|
|
22,543,561
|
|
|
|
19,295,699
|
|
|
|
14,005,216
|
|
|
|
|
(1) |
|
Noncontrolling interest is included in total stockholders
(deficit) equity for all periods presented. |
31
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On August 24, 2009, we completed the purchase of the
outstanding stock of somniTech, Inc. and somniCare, Inc.
(collectively Somni) and on September 14, 2009,
we completed the purchase of the outstanding stock of Avastra
Eastern Sleep Centers, Inc. (now Nocturna East, Inc. and
referred to herein as Eastern). Somni and Eastern
were purchased from AvastraUSA, Inc. and Avastra Sleep Centres
Limited (collectively Avastra). Somni provides
diagnostic sleep testing services and care management for sleep
disorders at sleep diagnostic centers in Iowa, Kansas,
Minnesota, Missouri, Nebraska and South Dakota. Eastern manages
sleep diagnostic testing centers in Florida and New York. As
purchase consideration for Somni, we paid Avastra cash of
$5.9 million. As purchase consideration for Eastern, we
paid Avastra cash of $3.2 million and issued Avastra
652,795 shares of our common stock and Daniel I.
Rifkin, M.D. 100,000 shares of our common stock, which
collectively had a value of $1.5 million.
The unaudited pro forma condensed combined balance sheet as of
December 31, 2009 was prepared as if the acquisitions had
occurred on that date and combines our historical consolidated
balance sheet with the unaudited balance sheets of Somni and
Eastern as of December 31, 2009. The unaudited pro forma
condensed combined statements of operations for the years ended
December 31, 2009 and 2008 were prepared as if the
acquisition had occurred on the first day of the period
presented and combines our historical consolidated statements of
operations with the unaudited historical consolidated statements
of operations of Somni and Eastern.
The unaudited pro forma condensed combined financial statements
have been prepared for informational purposes only, to show the
effect of our combination with Somni and Eastern on a historical
basis. These financial statements do not purport to be
indicative of the financial position or results of operations
that would have actually occurred had the business combination
been in effect at those dates, nor do they project the expected
results of operations or financial position for any future
period or date.
The unaudited pro forma condensed combined financial statements
do not reflect any adjustments for non-recurring items or
anticipated synergies resulting from the acquisition. The
purchase price allocation is not finalized, because we are still
in the process of finalizing our estimates of fair value for
property, equipment and intangible assets acquired. Accordingly,
we have prepared the pro forma adjustments based on assumptions
we believe are reasonable but that are subject to change as
additional information becomes available and the preliminary
purchase price allocation is finalized.
32
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Graymark
|
|
|
Somni
|
|
|
Eastern
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
(Notes 2 - 4)
|
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
869,214
|
|
|
$
|
90,038
|
|
|
$
|
134,393
|
|
|
$
|
|
|
|
$
|
1,093,645
|
|
Accounts receivable, net
|
|
|
2,673,032
|
|
|
|
1,029,808
|
|
|
|
355,119
|
|
|
|
|
|
|
|
4,057,959
|
|
Inventories
|
|
|
272,282
|
|
|
|
79,303
|
|
|
|
|
|
|
|
|
|
|
|
351,585
|
|
Current assets from discontinued operations
|
|
|
16,312,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,312,028
|
|
Other current assets
|
|
|
476,889
|
|
|
|
44,184
|
|
|
|
11,250
|
|
|
|
|
|
|
|
532,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,603,445
|
|
|
|
1,243,333
|
|
|
|
500,762
|
|
|
|
|
|
|
|
22,347,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,807,210
|
|
|
|
1,361,642
|
|
|
|
149,828
|
|
|
|
|
|
|
|
5,318,680
|
|
Intangible assets, net
|
|
|
478,611
|
|
|
|
1,408,689
|
|
|
|
3,984,278
|
|
|
|
|
|
|
|
5,871,578
|
|
Goodwill
|
|
|
16,505,785
|
|
|
|
3,747,379
|
|
|
|
163,730
|
|
|
|
|
|
|
|
20,516,894
|
|
Other assets from discontinued operations
|
|
|
21,087,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,087,323
|
|
Other assets
|
|
|
725,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
63,307,636
|
|
|
$
|
7,761,043
|
|
|
$
|
4,798,598
|
|
|
$
|
|
|
|
$
|
75,867,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
158,015
|
|
|
$
|
161,071
|
|
|
$
|
23,276
|
|
|
$
|
|
|
|
$
|
342,362
|
|
Accrued liabilities
|
|
|
1,313,146
|
|
|
|
377,132
|
|
|
|
62,320
|
|
|
|
|
|
|
|
1,752,598
|
|
Short-term debt
|
|
|
195,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195,816
|
|
Intercompany
|
|
|
(6,648,584
|
)
|
|
|
2,195,871
|
|
|
|
4,452,713
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
473,306
|
|
|
|
6,895
|
|
|
|
|
|
|
|
|
|
|
|
480,201
|
|
Current liabilities from discontinued operations
|
|
|
7,890,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,890,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,382,106
|
|
|
|
2,740,969
|
|
|
|
4,538,309
|
|
|
|
|
|
|
|
10,661,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
17,295,703
|
|
|
|
4,920,172
|
|
|
|
|
|
|
|
|
|
|
|
22,215,875
|
|
Liabilities from discontinued operations
|
|
|
23,694,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,694,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
44,372,128
|
|
|
|
7,661,141
|
|
|
|
4,538,309
|
|
|
|
|
|
|
|
56,571,578
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock $0.0001 par value, 500,000,000 shares
authorized; 28,989,145 issued and outstanding
|
|
|
2,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,899
|
|
Paid-in capital
|
|
|
29,086,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,086,750
|
|
Accumulated deficit
|
|
|
(10,229,662
|
)
|
|
|
99,902
|
|
|
|
260,289
|
|
|
|
|
|
|
|
(9,869,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Graymark Healthcare shareholders equity
|
|
|
18,859,987
|
|
|
|
99,902
|
|
|
|
260,289
|
|
|
|
|
|
|
|
19,220,178
|
|
Noncontrolling interest
|
|
|
75,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
18,935,508
|
|
|
|
99,902
|
|
|
|
260,289
|
|
|
|
|
|
|
|
19,295,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
63,307,636
|
|
|
$
|
7,761,043
|
|
|
$
|
4,798,598
|
|
|
$
|
|
|
|
$
|
75,867,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed combined
financial statements
33
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Graymark
|
|
|
Somni
|
|
|
Eastern
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
(Notes 2 - 4)
|
|
|
|
|
|
Revenues
|
|
$
|
13,553,814
|
|
|
$
|
9,846,402
|
|
|
$
|
4,735,747
|
|
|
$
|
(2,289,174
|
)
|
|
$
|
25,846,789
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
|
6,516,685
|
|
|
|
3,978,774
|
|
|
|
1,713,322
|
|
|
|
(1,713,322
|
)
|
|
|
10,495,459
|
|
Selling, general and administrative
|
|
|
10,321,106
|
|
|
|
4,924,966
|
|
|
|
1,918,567
|
|
|
|
(560,988
|
)
|
|
|
16,603,651
|
|
Bad debt expense
|
|
|
2,588,309
|
|
|
|
59,898
|
|
|
|
|
|
|
|
|
|
|
|
2,648,207
|
|
Depreciation and amortization
|
|
|
969,784
|
|
|
|
354,921
|
|
|
|
144,443
|
|
|
|
|
|
|
|
1,469,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,395,884
|
|
|
|
9,318,559
|
|
|
|
3,776,332
|
|
|
|
(2,274,310
|
)
|
|
|
31,216,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
(858,725
|
)
|
|
|
(180,315
|
)
|
|
|
(69,129
|
)
|
|
|
|
|
|
|
(1,108,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
(7,700,795
|
)
|
|
|
347,528
|
|
|
|
890,286
|
|
|
|
(14,864
|
)
|
|
|
(6,477,845
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
145,616
|
|
|
|
260,465
|
|
|
|
(406,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
(7,700,795
|
)
|
|
|
201,912
|
|
|
|
629,821
|
|
|
|
391,217
|
|
|
|
(6,477,845
|
)
|
Income from discontinued operations, net of taxes
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(5,701,894
|
)
|
|
|
201,912
|
|
|
|
629,821
|
|
|
|
391,217
|
|
|
|
(4,478,944
|
)
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Graymark Healthcare
|
|
$
|
(5,548,088
|
)
|
|
$
|
201,912
|
|
|
$
|
629,821
|
|
|
$
|
391,217
|
|
|
$
|
(4,325,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.22
|
)
|
Income from discontinued operations
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
28,414,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding
|
|
|
28,414,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed combined
financial statements
34
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Graymark
|
|
|
Somni
|
|
|
Eastern
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
(Notes 2 - 4)
|
|
|
|
|
|
Revenues
|
|
$
|
15,292,164
|
|
|
$
|
9,551,447
|
|
|
$
|
5,544,843
|
|
|
$
|
(2,947,088
|
)
|
|
$
|
27,441,366
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
|
5,779,918
|
|
|
|
4,180,074
|
|
|
|
2,342,821
|
|
|
|
(2,342,821
|
)
|
|
|
9,959,992
|
|
Selling, general and administrative
|
|
|
7,726,693
|
|
|
|
4,292,453
|
|
|
|
1,806,400
|
|
|
|
(444,505
|
)
|
|
|
13,381,041
|
|
Depreciation and amortization
|
|
|
598,627
|
|
|
|
398,976
|
|
|
|
162,959
|
|
|
|
|
|
|
|
1,160,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,105,238
|
|
|
|
8,871,503
|
|
|
|
4,312,180
|
|
|
|
(2,787,326
|
)
|
|
|
24,501,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
(696,181
|
)
|
|
|
(85,104
|
)
|
|
|
(76,111
|
)
|
|
|
|
|
|
|
(857,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
490,745
|
|
|
|
594,840
|
|
|
|
1,156,552
|
|
|
|
(159,762
|
)
|
|
|
2,082,375
|
|
Provision for income taxes
|
|
|
|
|
|
|
237,936
|
|
|
|
462,621
|
|
|
|
(63,905
|
)
|
|
|
636,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
490,745
|
|
|
|
356,904
|
|
|
|
693,931
|
|
|
|
(95,857
|
)
|
|
|
1,445,723
|
|
Income from discontinued operations, net of taxes
|
|
|
806,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
806,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
1,297,368
|
|
|
|
356,904
|
|
|
|
693,931
|
|
|
|
(95,857
|
)
|
|
|
2,252,346
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
552,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Graymark Healthcare
|
|
$
|
744,398
|
|
|
$
|
356,904
|
|
|
$
|
693,931
|
|
|
$
|
(95,857
|
)
|
|
$
|
1,699,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
Income from discontinued operations
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
25,885,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,638,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding
|
|
|
26,102,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,855,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed combined
financial statements
35
NOTES TO
UNAUDITED PRO FORMA CONDENSED
COMBINED
FINANCIAL STATEMENTS
|
|
(1)
|
BASIS FOR
PRESENTATION
|
The pro forma condensed combined financial statements present
the pro forma effects of the acquisition by Graymark Healthcare,
Inc. (Graymark) of the outstanding equity ownership
interests in somniTech, Inc. and somniCare, Inc. (collectively
Somni) for $5.9 million in cash the outstanding
equity ownership interests in Avastra Eastern Sleep Centers,
Inc. (Eastern) for $3.2 million in cash and
752,795 shares of Graymark common stock (the
Acquisition). The Acquisition will be accounted for
as a purchase of Somni and Eastern by Graymark using the
acquisition method of accounting.
The accompanying unaudited pro forma combining consolidated
statements of operations are presented assuming the Acquisition
was consummated on the first day of the period presented. The
unaudited pro forma combining consolidated balance sheet as of
December 31, 2009, is presented assuming the actual date of
the Acquisition.
The historical information presented for Graymark as of
December 31, 2009 and the years ended December 31,
2009 and 2008, is derived from the consolidated financial
statements of Graymark contained in our Annual Report on
Form 10-K.
The historical information presented for Somni as of
December 31, 2009 and the years ended December 31,
2009 and 2008, is derived from the unaudited financial
statements of somniTech, Inc. and somniCare, Inc.
The historical information presented for Eastern as of
December 31, 2009 and the years ended December 31,
2009 and 2008, is derived from the unaudited financial
statements of Eastern.
The pro forma financial information presented in the unaudited
pro forma combining consolidated financial statements is not
necessarily indicative of the financial position and results of
operations that would have been achieved had the assets and
liabilities been owned by a single corporate entity. The results
of operations presented in the unaudited pro forma combining
statements of operations are not necessarily indicative of the
results of future operations of Graymark following consummation
of the Acquisition.
|
|
(2)
|
ADJUSTMENTS
THE ACQUISITION
|
The accompanying unaudited pro forma consolidated financial
statements have been adjusted to give effect to the Acquisition
as follows:
(a) Income taxes reflect the effect of the historical
earnings of Somni and Eastern and the pro forma adjustment for
the year ended December 31, 2009 to reflect the offset of
Somni and Eastern earnings against the losses of Graymark.
(b) Revenue, cost of services and sales, and selling,
general and administrative expenses have been reduced to reflect
the management services agreement (MSA) operating
model that was implemented at Eastern after the Acquisition.
Under the MSA, Eastern receives management fee income for
operating the respective sleep center and providing additional
services to the physician group. The cost of the sleep studies
performed and the personnel costs of sleep technicians are born
by the physician group that performs the sleep studies.
Since the Acquisition was consummated prior to December 31,
2009, the following post-Acquisition transactions are already
reflected in the unaudited pro forma information, including the
following:
(a) The recording of goodwill of $3,911,109 and intangible
assets of $5,446,000, based on a preliminary allocation of the
purchase price of Somni and Eastern to the net assets acquired.
The
36
intangible assets of $5,446,000 recorded during 2009 consisted
of customer relationships with indefinite lives of $3,870,000,
customer relationships of $970,000 (amortizable over 5 to
15 years), trademarks having a value of $221,000
(amortizable over 10 years), covenants not to compete of
$195,000 (amortizable over the period of the covenants not to
compete, 3 to 15 years) and payor contracts of $190,000
(amortizable over 15 years).
Pro forma per share calculations for Graymark are based upon the
weighted average number of common stock shares assuming the
Acquisition occurred on the first day of the period presented.
The provision for income taxes is based on the federal corporate
statutory 35% income tax rate, plus an estimated 5% rate for
state income taxes.
37
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our
consolidated financial statements and the related notes which
have been incorporated by reference into this prospectus. This
discussion contains forward-looking statements about our
business and operations. Our actual results may differ
materially from those we currently anticipate as a result of the
factors we describe under Risk Factors and elsewhere
in this prospectus.
Overview
Graymark Healthcare, Inc. is organized under the laws of the
state of Oklahoma and is one of the largest providers of care
management solutions to the sleep disorder market based on
number of independent sleep care centers and hospital sleep
diagnostic programs operated in the United States. We provide a
comprehensive diagnosis and care management solution for
patients suffering from sleep disorders.
We provide diagnostic sleep testing services and care management
solutions (referred to as SMS) for people with
chronic sleep disorders. In addition, we sell equipment and
related supplies and components used to treat sleep disorders.
Our products and services are used primarily by patients with
obstructive sleep apnea, or OSA. Our sleep centers provide
monitored sleep diagnostic testing services to determine sleep
disorders in the patients being tested. The majority of the
sleep testing is to determine if a patient has OSA. A continuous
positive airway pressure, or CPAP, device is the American
Academy of Sleep Medicines, or AASM, preferred method of
treatment for obstructive sleep apnea. Our sleep diagnostic
facilities also determine the correct pressure settings for
patient treatment with positive airway pressure. We sell CPAP
devices and supplies to patients who have tested positive for
sleep apnea and have had their positive airway pressure
determined. There are certain noncontrolling interest holders in
our testing facilities, who are typically physicians in the
geographical area being served by the diagnostic sleep testing
facility.
Discontinued
Operations
On September 1, 2010, we executed an Asset Purchase
Agreement, which was subsequently amended on October 29,
2010, (as amended, the Agreement) providing for the
sale of substantially all of the assets of the Companys
subsidiary, ApothecaryRx to Walgreens. ApothecaryRx operates 18
retail pharmacy stores selling prescription drugs and a small
assortment of general merchandise, including diabetic
merchandise, non-prescription drugs, beauty products and
cosmetics, seasonal merchandise, greeting cards and convenience
foods. The final closing of the sale of ApothecaryRxs
assets occurred in December 2010. As a result of the sale of
ApothecaryRxs assets, the related assets, liabilities,
results of operations and cash flows of ApothecaryRx have been
classified as discontinued operations.
Under the Agreement, the consideration for the ApothecaryRx
assets purchased and liabilities assumed is $25,500,000 plus up
to $7,000,000 for inventory (Inventory Amount), but
less any payments remaining under goodwill protection agreements
and any amounts due under promissory which are assumed by buyer
(the Purchase Price). For purposes of determining
the Inventory Amount, the parties agreed to hire an independent
valuator to perform a review and valuation of inventory being
purchased from each pharmacy location. We received approximately
$24.5 million in net proceeds from the sale of assets of
which $2.0 million was deposited into an indemnity escrow
account (the Indemnity Escrow Fund) as previously
agreed pursuant to the terms of an indemnity escrow agreement.
These proceeds are net of approximately $1.0 million of
security deposits transferred to the buyer and the assumption by
the buyer of liabilities associated with goodwill protection
agreements and promissory notes. We also received an additional
$3.8 million for the sale of inventory to Buyer at 17 of
our pharmacies with the inventory for the remaining pharmacy
being sold as part of the litigation settlement. We intend to
continue to collect retained accounts receivable and realize
additional proceeds from the sale of any remaining inventory,
equipment and fixtures not sold to the buyer. All proceeds from
the sale of ApothecaryRx were deposited in a restricted account
at Arvest Bank. Of the proceeds, $22,000,000 was used to reduce
outstanding obligations under our credit facility with Arvest
Bank.
38
We are required to pay Arvest Bank an additional
$3.0 million by January 6, 2011. We are currently in
discussions with Arvest Bank regarding this payment and our
compliance with required financial covenants.
Generally, on the
12-month
anniversary of the final closing date of the sale of
ApothecaryRx, 50% of the remaining funds held in the Indemnity
Escrow Fund will be released, subject to deduction for any
pending claims for indemnification. All remaining funds held in
the Indemnity Escrow Fund, if any, will be released on the
18-month
anniversary of the final closing date of the sale, subject to
any pending claims for indemnification. Of the $2,000,000
Indemnity Escrow Fund, $1,000,000 is subject to partial or full
recovery by the buyer if the average daily prescription sales at
the buyers location in Sterling, Colorado over a six-month
period after the buyer purchases our location in Sterling,
Colorado does not increase by a certain percentage of the
average daily prescription sales by our Sterling, Colorado
location (the Retention Rate Earnout).
On December 6, 2010, we settled the litigation with certain
former employees of our retail pharmacy in Sterling, Colorado
and their affiliates. As part of the settlement, we and
Walgreens sold assets to certain of the defendants comprising
the long-term care pharmacy business and certain other assets
and we agreed to revoke the preliminary injunction and the
defendants agreed to non-competition arrangements. On
October 8, 2010, we commenced litigation in
U.S. District Court for the District of Colorado against
certain former employees of our retail pharmacy in Sterling,
Colorado and their affiliates. We claimed, among other things,
breaches of certain contractual arrangements and seek monetary
damages. On October 13, 2010, a stipulated preliminary
injunction was issued in our favor.
Acquisitions
Growth Strategy
We are currently growing our SMS business through strategic
business acquisitions. Most recently, on August 19, 2009,
SDC Holdings, one of our subsidiaries, entered into an agreement
with AvastraUSA, Inc. and Avastra Sleep Centres Limited ABN to
acquire 100% of the equity of somniTech, Inc. and somniCare,
Inc. (collectively referred to as Somni) and Avastra
Eastern Sleep Centers, Inc. (Eastern) for cash and
stock consideration totaling $10.6 million. The Somni
acquisition closed on August 24, 2009 and the Eastern
acquisition closed on September 14, 2009. The various
acquisitions that we made during first nine months of 2010 and
the years ending December 31, 2009 and 2008 are summarized
in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
Business
|
|
Purchase
|
|
|
Financed by
|
|
Acquisition Date
|
|
Acquired(1)
|
|
Price
|
|
|
Seller
|
|
|
September 2009
|
|
Avastra Eastern Sleep Centers, Inc. (Eastern)
|
|
$
|
4,700,000
|
|
|
$
|
|
|
August 2009
|
|
somniTech, Inc. and somniCare, Inc. (Somni)
|
|
|
5,900,000
|
|
|
|
|
|
June 2008
|
|
Sleep Center of Waco, Ltd., Plano Sleep Center, Ltd. and
Southlake Sleep Center, Ltd. (Texas Labs)
|
|
|
960,000
|
|
|
|
|
|
June 2008
|
|
Nocturna Sleep Center, LLC (Nocturna)
|
|
|
2,172,790
|
|
|
|
726,190
|
|
April 2008
|
|
Roll-up of
noncontrolling interests in certain SMS sleep centers
(Minority)
|
|
|
1,616,356
|
|
|
|
|
|
|
|
|
(1) |
|
All of the acquisitions were asset purchases, other than the
acquisitions of somniCare, Inc., somniTech, Inc., Nocturna East
and Nocturna, which were entity purchases. |
In connection with the acquisitions during 2009, we recorded
goodwill of $3,911,109 and intangible assets of $5,446,000,
based on a preliminary allocation of the purchase price to the
net assets acquired. The intangible assets of $5,446,000
recorded during 2009 consisted of customer relationships with
indefinite lives of $3,870,000, customer relationships of
$970,000 (amortizable over 5 to 15 years), trademarks
having a value of $221,000 (amortizable over 10 years),
covenants not to compete of $195,000 (amortizable over the
period of the covenants not to compete, 3 to 15 years) and
payor contracts of $190,000 (amortizable over 15 years). In
2008, we recorded goodwill of $3,402,431 and intangible assets
of $630,000 consisting of covenants not to compete having a
value of $100,000 (amortizable over the period of the covenants
not to compete, three years), customer lists of $480,000
(amortizable over 15 years) and trademarks of $50,000
(amortizable over 15 years).
39
Results
of Operations
The following table sets forth selected results of our
operations for the nine months ended September 30, 2010 and
2009. The following information was derived and taken from our
unaudited financial statements, which have been incorporated by
reference into this prospectus.
Comparison
of the Nine Month Periods Ended September 30, 2010 and
2009
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net revenues
|
|
$
|
17,497,513
|
|
|
$
|
11,449,888
|
|
Cost of services and sales
|
|
|
5,337,228
|
|
|
|
3,512,272
|
|
Operating expenses
|
|
|
14,082,596
|
|
|
|
9,016,536
|
|
Bad debt expense
|
|
|
1,155,583
|
|
|
|
3,679,737
|
|
Impairment of fixed assets
|
|
|
762,224
|
|
|
|
|
|
Net other income (expense)
|
|
|
(1,681,504
|
)
|
|
|
(616,380
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
(4,759,398
|
)
|
|
|
(5,375,037
|
)
|
Benefit (provision) for income taxes
|
|
|
(47,192
|
)
|
|
|
208,000
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
(4,806,590
|
)
|
|
|
(5,167,037
|
)
|
Discontinued operations, net of taxes
|
|
|
(623,399
|
)
|
|
|
1,279,707
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(5,429,989
|
)
|
|
|
(3,887,330
|
)
|
Less: Noncontrolling interests
|
|
|
(95,961
|
)
|
|
|
(241,768
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Graymark Healthcare
|
|
$
|
(5,334,028
|
)
|
|
$
|
(3,645,562
|
)
|
|
|
|
|
|
|
|
|
|
Discussion
of Nine Month Periods Ended September 30, 2010 and
2009
Net revenues increased $6.0 million during the nine
months ended September 30, 2010 compared with the first
nine months of 2009. The increase in net revenues was primarily
due to:
|
|
|
|
|
a decrease in the revenues from existing sleep center locations
of approximately $1.3 million during the nine months ended
September 30, 2010, compared with the same period in 2009.
The decline in revenues from sleep diagnostic services at
existing locations of $1.1 million is primarily due to
lower volumes (approximately $0.8 million) and lower
revenue per sleeps study (approximately $0.3 million)
compared to the same period in 2009. The decline in therapy
revenue of $0.2 million is due to the adjustment in the
reserve for contractual allowances in 2009 of approximately
$0.6 million. The offsetting increase in therapy revenue
was driven by increases in both
set-up and
re-supply volumes, offset by lower average revenue per
set-up
compared to the same period in 2009.; and
|
|
|
|
|
|
the acquisition of somniTech, Inc. and somniCare, Inc.
(collectively Somni) in August 2009 and Avastra
Eastern Sleep Centers, Inc. (Eastern) in September
2009 which resulted in an increase in net revenues of
$7.3 million.
|
Cost of sales and services increased $1.8 million
during the nine months ended September 30, 2010 compared
with the first nine months of 2009. The acquisition of Somni and
Eastern resulted in an increase in cost of sales and services of
approximately $2.2 million. Cost of sales and services at
existing sleep center locations decreased $0.4 million.
Cost of sales and services as a percent of net revenues was 31%
during the nine months ended September 30, 2010 and 2009.
Operating expenses increased $5.1 million during the
nine months ended September 30, 2010, compared with the
first nine months of 2009. Operating expenses at our sleep
management operations increased $4.2 million due primarily
to the acquisitions of Somni and Eastern in August and September
2009 which resulted in increased operating expenses of
$4.1 million. Additionally, we have invested
$0.1 million in the
40
development of an internet based sales channel. Operating
expenses in our existing sleep diagnostic and therapy operations
have been flat compared to the same period in 2009. Overhead
incurred at the parent-company level which includes our
public-company costs increased approximately $0.9 million
primarily due to increased stock compensation expense and
professional fees.
Bad debt expense decreased approximately
$2.5 million during the nine months ended
September 30, 2010 compared with the first nine months of
2009. During June 2009, we recorded a bad debt expense of
approximately $2.6 million related to a change in the
estimates used to determine the allowance for contractual
allowances and doubtful accounts. The change in estimates used
was a result of our quarterly analysis of our allowance for
doubtful accounts based on historical collection trends using
newly available information related to the correlation of the
ultimate collectability of an account and the aging of that
account.
Impairment of fixed assets during the third
quarter of 2010, we identified impairment indicators at certain
sleep diagnostic facilities and office facilities. The
impairment indicators related to certain sleep diagnostic
systems that were no longer compatible with current systems and
assets associated with certain sleep diagnostic and office
facilities closed or consolidated into existing facilities.
Accordingly, we performed a recoverability test and an
impairment test on these locations and determined, based on the
results of an undiscounted cash flow analysis (level 3 in
the fair value hierarchy), that the fair value of the identified
assets was less than their carrying value. As a result, an
impairment charge of $762,224 was recorded.
Net other expense represents interest expense on
borrowings reduced by interest income earned on cash and cash
equivalents. Net other expense increased approximately
$0.3 million during the nine months ended
September 30, 2010 compared with the first nine months of
2009. The increase is due to interest expense incurred on
increased borrowings related to the acquisition of Somni and
Eastern.
Income from discontinued operations represents the net
income (loss) from the pharmacy operations of ApothecaryRx. In
September 2010, we entered into an agreement to sale
substantially all of the assets of ApothecaryRx. The closing of
the sale of ApothecaryRx occurred in December 2010. As a result
of the sale of ApothecaryRx, the related assets, liabilities,
results of operations and cash flows of ApothecaryRx have been
classified as discontinued operations. The results of
ApothecaryRx for the nine months ended September 30, 2010
and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenues
|
|
$
|
65,599,725
|
|
|
$
|
66,643,918
|
|
|
|
|
|
|
|
|
|
|
Income from operations, net of taxes
|
|
$
|
848,973
|
|
|
$
|
1,279,707
|
|
Estimated (charges) incurred on sale of business
|
|
|
(1,472,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(623,399
|
)
|
|
$
|
1,279,707
|
|
|
|
|
|
|
|
|
|
|
Net revenues and income from operations for ApothecaryRx
decreased $1.0 and $0.4 million, respectively, during the
nine months ended September 30, 2010 compared with the
first nine months of 2009. This decrease is due to a decline in
revenues from existing (or same store) pharmacy locations
compared with the first nine months of 2009. The decrease in
same store revenues and earnings was primarily due to a
continued shift to generic drugs which have a lower average
price per prescription compared to branded drugs. In conjunction
with the sale of ApothecaryRx assets, we recognized a charge of
approximately $1.4 million during September 2010. This
charge is comprised of estimated severance, payroll, lease
termination and other costs incurred as a result of the sale.
Additional charges may be recorded in future periods dependent
upon the timing and results of the final transaction.
Noncontrolling interests were allocated approximately
$96,000 of net losses during the nine months ended
September 30, 2010 compared with the first nine months of
2009 when noncontrolling interests were allocated approximately
$242,000 in net losses. Noncontrolling interests are the equity
ownership interests in our SDC Holdings subsidiaries that are
not wholly-owned. The change in noncontrolling is due to the
fluctuation in net earnings generated at our non-wholly owned
SDC Holdings subsidiaries attributable to the equity ownership
interests that we do not own.
41
Net income (loss) attributable to Graymark
Healthcare. Our operations resulted in a net loss
of approximately $5.3 million (31% of approximately
$17.5 million in net revenues) during the first nine months
of 2010, compared to a net loss of approximately
$3.6 million (32% of approximately $11.4 million in
net revenues) during the first nine months of 2009.
Comparison
of Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
Net revenues
|
|
$
|
17,571,539
|
|
|
|
|
|
|
$
|
15,292,164
|
|
Cost of services and sales
|
|
|
7,735,085
|
|
|
|
|
|
|
|
5,779,918
|
|
Operating expenses
|
|
|
13,576,126
|
|
|
|
|
|
|
|
8,325,320
|
|
Change in accounting estimate
|
|
|
2,648,207
|
|
|
|
|
|
|
|
|
|
Net other income (expense)
|
|
|
(952,724
|
)
|
|
|
|
|
|
|
(696,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
(7,340,603
|
)
|
|
|
|
|
|
|
490,745
|
|
Benefit (provision) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
(7,340,603
|
)
|
|
|
|
|
|
|
490,745
|
|
Discontinued operations, net of taxes
|
|
|
1,998,901
|
|
|
|
|
|
|
|
806,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(5,341,702
|
)
|
|
|
|
|
|
|
1,297,368
|
|
Less: Noncontrolling interests
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
552,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Graymark Healthcare
|
|
$
|
(5,187,896
|
)
|
|
|
|
|
|
$
|
744,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
of Years Ended December 31, 2009 and 2008
Net revenues increased $2.3 million (a 15% increase)
to $17.6 million during 2009 from $15.3 million in
2008. This increase was primarily due to:
|
|
|
|
|
the acquisitions of Somni and Eastern in August and September
2009, respectively, resulted in an increase in revenue of
$4.0 million,
|
|
|
|
|
|
the two business acquisitions made by our SMS operating segment
in June 2008 resulted in an increase of revenue of
$1.6 million related to a full year of operation in 2009
compared with seven months of operation in 2008,
|
|
|
|
|
|
the opening of two sleep centers in February 2009 and June 2008
resulted in an increase of $0.7 million, and
|
|
|
|
|
|
a combination of lower volumes and overall lower net revenue per
sleep study performed resulted in a decrease in the revenues
from existing sleep center locations of approximately
$4.0 million.
|
Revenues from our existing sleep therapy business were flat in
2009 compared to 2008. Revenues from CPAP sales were down in
2009 compared with 2008 due to lower sales volumes related to
the decrease in sleep study volumes. The reduction in CPAP sales
revenues was offset by sales from our re-supply program which
was implemented during 2009.
Cost of sales and services increased approximately
$2.0 million (a 34% increase) to $7.7 million during
2009 from $5.8 million in 2008. This increase was primarily
due to:
|
|
|
|
|
the acquisitions of Somni and Eastern in August and September
2009, respectively, resulted in an increase in cost of sales and
services of $1.2 million,
|
|
|
|
|
|
the two acquisitions made by our SMS operating segment in June
2008 resulted in an increase in cost of sales and services of
$0.6 million related to a full year of operation in 2009
compared with seven months of operation in 2008,
|
42
|
|
|
|
|
the opening of two sleep centers in February 2009 and June 2008
that resulted in an increase of $0.3 million in cost of
sales and services, and
|
|
|
|
|
|
a decrease in cost of sales and services at existing sleep
centers of $0.1 million.
|
Cost of sales and services as a percent of net revenues was 44%
during 2009 compared with 38% during 2008. The increase is
primarily due to lower revenue per sleep study in 2009 compared
to 2008. Reduced reimbursement rates per sleep study results in
a higher percentage of cost of sales to net revenue. The cost to
perform a sleep study is primarily related to labor costs for
technicians who perform the studies.
Operating expenses increased $5.3 million during
2009 compared to 2008. Operating expenses at our sleep
management operations increased $4.0 million due primarily
to:
|
|
|
|
|
the acquisitions of Somni and Eastern in August and September
2009, respectively, resulted in an increase in operating
expenses of approximately $2.3 million,
|
|
|
|
|
|
the two acquisitions made by our SMS operating segment in June
2008 resulted in an increase in operating expenses of
$0.5 million related to a full year of operation in 2009
compared with seven months of operation in 2008,
|
|
|
|
|
|
the opening of two sleep centers in February 2009 and July 2008
resulted in an increase of $0.3 million related to the
additional months operated in 2009 versus 2008, and
|
|
|
|
|
|
an increase in operational overhead of $0.9 million
associated with an increase in our operational infrastructure
needed to absorb the acquisitions made to date along with
anticipated future acquisitions.
|
Overhead incurred at the parent-company level which includes our
public-company costs increased approximately $1.3 million
primarily due to costs incurred related to the acquisitions we
made during 2009.
Change in accounting estimate was $2,648,207 during 2009
and represents a change in the estimates used to determine the
allowance for contractual allowances and doubtful accounts.
Net other expense represents interest expense on
borrowings reduced by interest income earned on cash and cash
equivalents. Net other expense increased approximately
$0.3 million during 2009 compared with 2008. The increase
is due to interest expense incurred on increased borrowings
related to the acquisition of Somni and Eastern.
Income from discontinued operations represents the net
income from the pharmacy operations of ApothecaryRx. In
September 2010, we entered into an agreement to sale
substantially all of the assets of ApothecaryRx. The closing of
the sale of ApothecaryRx occurred in December 2010. As a result
of the sale of ApothecaryRx, the related assets, liabilities,
results of operations and cash flows of ApothecaryRx have been
classified as discontinued operations. The results of
ApothecaryRx for the years ended December 31, 2009 and 2008
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
89,669,301
|
|
|
$
|
81,329,158
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
1,998,901
|
|
|
$
|
806,623
|
|
|
|
|
|
|
|
|
|
|
Net revenues and income from operations for ApothecaryRx
increased $8.3 and $1.2 million, respectively, during 2009
compared with 2008. During 2009, we operated 18 pharmacies.
During 2008, we operated 12 pharmacy locations until March 2008,
14 locations until June 2008 and 18 locations during the
remainder of 2008. During November 2008, we also acquired the
customer files from a pharmacy and merged them into one of our
existing locations. The increase in our pharmacy locations
resulted in an increase in net revenues of $9.6 million
related to the full year of operation in 2009 compared to two to
nine months of operation in 2008. Revenues during 2009 from
existing (or same store) pharmacy locations decreased
$1.3 million compared with 2008. The decrease in same store
revenues was primarily due to an increase in the percentage of
generic drug prescriptions which have a lower average price per
prescription.
43
Noncontrolling interests were allocated approximately
$153,000 of net losses during 2009 compared with 2008 when
noncontrolling interests were allocated approximately $553,000
in net income. Noncontrolling interests are the equity ownership
interests in our SDC Holdings subsidiaries that are not
wholly-owned. The change in noncontrolling is due to the
fluctuation in net earnings generated at our non-wholly owned
SDC Holdings subsidiaries attributable to the equity ownership
interests that we do not own.
Net income (loss) attributable to Graymark
Healthcare. Our operations resulted in a net loss
of approximately $5.2 million (30% of approximately
$17.6 million in net revenues) during 2009, compared to net
income of approximately $0.7 million (5% of approximately
$15.3 million in net revenues) during 2008.
Liquidity
and Capital Resources
Our liquidity and capital resources are provided principally
through cash generated from operations, loan proceeds and equity
offerings. Our cash and cash equivalents at September 30,
2010 totaled approximately $0.5 million. As of
September 30, 2010, we had working capital of approximately
$7.1 million.
Our operating activities during the nine months ended
September 30, 2010 provided net cash of approximately
$1.5 million compared to operating activities in the first
nine months of 2009 that used net cash of approximately
$1.9 million. The increase in cash flows provided by
operating activities was primarily attributable to an increase
in the cash provided from the operating activities of our
discontinued operations. The increase in operating cash flows of
our discontinued operations is primarily due to an increase in
accounts payable related to extended payment terms from certain
vendors. Operating activities from our continuing operations
improved by $0.3 million during the nine months ended
September 30, 2010 compared to the same period of 2009.
During the nine months ended September 30, 2010, our
operating activities from continuing operations included a net
loss of $5.3 million which was increased by the earnings
from discontinued operations of $0.6 million and offset by
depreciation and amortization of $1.0 million and
stock-based compensation of $0.4 million.
Our investing activities during the nine months ended
September 30, 2010 used net cash of approximately
$0.5 million compared to the first nine months of 2009
during which we used approximately $9.7 million for
investing activities. The decrease in the cash used in investing
activities was attributable to the purchases of Somni and
Eastern in 2009 which used $8.8 million.
Our financing activities during the nine months ended
September 30, 2010 used net cash of $2.0 million
compared to the first nine months of 2009 during which financing
activities provided $0.5 million. Financing activities
during 2009 included debt proceeds of $5.3 million.
On September 1, 2010, we executed an Asset Purchase
Agreement, which was subsequently amended on October 29,
2010, (as amended, the Agreement) providing for the
sale of substantially all of the assets of the Companys
subsidiary, ApothecaryRx to Walgreens. ApothecaryRx operates 18
retail pharmacy stores selling prescription drugs and a small
assortment of general merchandise, including diabetic
merchandise, non-prescription drugs, beauty products and
cosmetics, seasonal merchandise, greeting cards and convenience
foods. The final closing of the sale of ApothecaryRxs
assets occurred in December 2010. As a result of the sale of
ApothecaryRxs assets, the related assets, liabilities,
results of operations and cash flows of ApothecaryRx have been
classified as discontinued operations.
Under the Agreement, the consideration for the ApothecaryRx
assets purchased and liabilities assumed is $25,500,000 plus up
to $7,000,000 for inventory (Inventory Amount), but
less any payments remaining under goodwill protection agreements
and any amounts due under promissory which are assumed by buyer
(the Purchase Price). For purposes of determining
the Inventory Amount, the parties agreed to hire an independent
valuator to perform a review and valuation of inventory being
purchased from each pharmacy location. We received approximately
$24.5 million in net proceeds from the sale of assets of
which $2.0 million was deposited into an indemnity escrow
account (the Indemnity Escrow Fund) as previously
agreed pursuant to the terms of an indemnity escrow agreement.
These proceeds are net of approximately $1.0 million of
security deposits transferred to the buyer and the assumption by
the buyer of liabilities associated with goodwill protection
agreements and promissory notes. We also received an additional
$3.8 million for the sale
44
of inventory to Buyer at 17 of our pharmacies with the
inventory for the remaining pharmacy being sold as part of the
litigation settlement We intend to continue to collect retained
accounts receivable and realize additional proceeds from the
sale of any remaining inventory, equipment and fixtures not sold
to the buyer. All proceeds from the sale of ApothecaryRx were
deposited in a restricted account at Arvest Bank. Of the
proceeds, $22,000,000 was used to reduce outstanding obligations
under our credit facility with Arvest Bank. We are required to
pay Arvest Bank an additional $3.0 million by
January 6, 2011. We are currently in discussions with
Arvest Bank regarding this payment and our compliance with
required financial covenants.
Generally, on the
12-month
anniversary of the final closing date of the sale of
ApothecaryRx, 50% of the remaining funds held in the Indemnity
Escrow Fund will be released, subject to deduction for any
pending claims for indemnification. All remaining funds held in
the Indemnity Escrow Fund, if any, will be released on the
18-month
anniversary of the final closing date of the sale, subject to
any pending claims for indemnification. Of the $2,000,000
Indemnity Escrow Fund, $1,000,000 is subject to partial or full
recovery by the buyer if the average daily prescription sales at
the buyers location in Sterling, Colorado over a six-month
period after the buyer purchases our location in Sterling,
Colorado does not increase by a certain percentage of the
average daily prescription sales by our Sterling, Colorado
location (the Retention Rate Earnout).
On December 6, 2010, we settled the litigation with certain
former employees of our retail pharmacy in Sterling, Colorado
and their affiliates. As part of the settlement, we and
Walgreens sold assets to certain of the defendants comprising
the long-term care pharmacy business and certain other assets
and we agreed to revoke the preliminary injunction and the
defendants agreed to non-competition arrangements. On
October 8, 2010, we commenced litigation in
U.S. District Court for the District of Colorado against
certain former employees of our retail pharmacy in Sterling,
Colorado and their affiliates. We claimed, among other things,
breaches of certain contractual arrangements and seek monetary
damages. On October 13, 2010, a stipulated preliminary
injunction was issued in our favor.
We expect to meet our obligations for the next twelve months
utilizing proceeds from the ApothecaryRx Sale, liquidation of
the remaining ApothecaryRx assets and from additional debt
and/or
equity financing, including net proceeds from this offering. We
seek to improve our liquidity through a combination of
operational improvements, debt reduction strategies and
increased equity or debt financing. We are currently evaluating
available options for raising additional financing. We may use
funds raised to fund operations and working capital, to expand
through acquisitions or by developing de novo sleep centers or
to refinance existing indebtedness. Through projected operating
improvements, we expect to ultimately generate positive working
capital from our continuing operations. However, there are no
assurances that we will be able to either (1) achieve a
level of revenues adequate to generate sufficient cash flow from
operations or (2) obtain additional financing through debt
or equity financing in an amount sufficient to support our
capital commitments and working capital requirements over the
next twelve months or that such additional financing will be on
terms favorable to us. Our principal capital commitments during
the next 12 months primarily involve payments of our
indebtedness and lease obligations of approximately
$3.3 million as of September 30, 2010.
Arvest
Credit Facility
Effective May 21, 2008, we and each of Oliver Company
Holdings, LLC, Roy T. Oliver, The Roy T. Oliver Revocable Trust,
Stanton M. Nelson, Vahid Salalati, Greg Luster, Kevin Lewis,
Roger Ely and, Lewis P. Zeidner (the Guarantors)
entered into a Loan Agreement with Arvest Bank (the Arvest
Credit Facility). The Arvest Credit Facility consolidated
the prior loan to our subsidiaries, SDC Holdings and
ApothecaryRx in the principal amount of $30 million
(referred to as the Term Loan) and provided an
additional credit facility in the principal amount of
$15 million (the Acquisition Line) for total
principal of $45 million. The Loan Agreement was
subsequently amended in January 2009 (the
Amendment), May 2009 (the Second
Amendment) and July 2010 (the Third
Amendment). As of September 30, 2010, the outstanding
principal amount of the Arvest Credit Facility was $44,396,935.
Personal Guaranties. The Guarantors
unconditionally guarantee payment of our obligations owed to
Arvest Bank and our performance under the Loan Agreement and
related documents. The initial liability of
45
the Guarantors as a group is limited to $15 million of the
last portion or dollars of our obligations collected by Arvest
Bank. The liability of the Guarantors under the guaranties
initially was in proportion to their ownership of our common
stock shares as a group on a several and not joint basis. In
conjunction with the employment termination of Mr. Luster,
we agreed to obtain release of his guaranty. The Amendment
released Mr. Luster from his personal guaranty and the
personal guaranties of the other Guarantors were increased,
other than the guaranties of Messrs. Salalati and Ely.
During the third quarter of 2010, Mr. Oliver and
Mr. Nelson assumed the personal guaranty of
Mr. Salalati.
Furthermore, the Guarantors agreed to not sell, transfer or
otherwise dispose of or create, assume or suffer to exist any
pledge, lien, security interest, charge or encumbrance on our
common stock shares owned by them that exceeds, in one or an
aggregate of transactions, 20% of the respective common stock
shares owned at May 21, 2008, except after notice to Arvest
Bank. Also, the Guarantors agreed to not sell, transfer or
permit to be transferred voluntarily or by operation of law
assets owned by the applicable Guarantor that would materially
impair the financial worth of the Guarantor or Arvest
Banks ability to collect the full amount of our
obligations.
Maturity Dates. Each advance or tranche of the
Acquisition Line will become due on the sixth anniversary of the
first day of the month following the date of advance or tranche
(the Tranche Note Maturity Date). The Term Loan
will become due on May 21, 2014. The following table
outlines the due dates of each tranche of debt under the
Acquisition Line:
|
|
|
|
|
|
|
|
|
Tranche
|
|
Amount
|
|
|
Maturity Date
|
|
|
#1
|
|
$
|
1,054,831
|
|
|
|
6/1/2014
|
|
#2
|
|
|
5,217,241
|
|
|
|
7/1/2014
|
|
#3
|
|
|
1,536,600
|
|
|
|
7/1/2014
|
|
#4
|
|
|
1,490,739
|
|
|
|
7/1/2014
|
|
#5
|
|
|
177,353
|
|
|
|
12/1/2014
|
|
#6
|
|
|
4,920,171
|
|
|
|
8/1/2015
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,396,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate. The outstanding principal
amounts of Acquisition Line and Term Loan bear interest at the
greater of the prime rate as reported in the Money
Rates section of The Wall Street Journal (the
WSJ Prime Rate) or 6% (Floor Rate).
Prior to June 30, 2010, the Floor Rate was 5%. The WSJ
Prime Rate is adjusted annually, subject to the Floor Rate, then
in effect on May 21 of each year of the Term Loan and the
anniversary date of each advance or tranche of the Acquisition
Line. In the event of our default under the terms of the Arvest
Credit Facility, the outstanding principal will bear interest at
the per annum rate equal to the greater of 15% or the WSJ Prime
Rate plus 5%.
Interest and Principal Payments. Provided we
are not in default, the Term Note is payable in quarterly
payments of accrued and unpaid interest on each
September 1, December 1, March 1, and
June 1. Commencing on September 1, 2011, and quarterly
thereafter on each December 1, March 1, June 1 and
September 1, we are obligated to make equal payments of
principal and interest calculated on a seven-year amortization
of the unpaid principal balance of the Term Note as of
June 1, 2011 at the then current WSJ Prime Rate or Floor
Rate, and adjusted annually thereafter for any changes to the
WSJ Prime Rate or Floor Rate as provided herein. The entire
unpaid principal balance of the Term Note plus all accrued and
unpaid interest thereon will be due and payable on May 21,
2014.
Furthermore, each advance or tranche of the Acquisition Line is
repaid in quarterly payments of interest only for up to three
years and thereafter, principal and interest payments based on a
seven-year amortization until the balloon payment on the
Tranche Note Maturity Date. We agreed to pay accrued and
unpaid interest only at the WSJ Prime Rate or Floor Rate in
quarterly payments on each advance or tranche of the Acquisition
Line for the first three years of the term of the advance or
tranche commencing three months after the first day of the month
following the date of advance and on the first day of each third
month thereafter. Commencing on the third anniversary of the
first quarterly payment date, and each following anniversary
46
thereof, the principal balance outstanding on an advance or
tranche of the Acquisition Line, together with interest at the
WSJ Prime Rate or Floor Rate on the most recent anniversary date
of the date of advance, will be amortized in quarterly payments
over a seven-year term beginning on the third anniversary of the
date of advance, and recalculated each anniversary thereafter
over the remaining portion of such seven-year period at the then
applicable WSJ Prime Rate or Floor Rate. The entire unpaid
principal balance of the Acquisition Line plus all accrued and
unpaid interest thereon will be due and payable on the
respective Tranche Note Maturity Date.
Use of Proceeds. All proceeds of the Term Loan
were used solely for the funding of the acquisition and
refinancing of the existing indebtedness and loans owed to
Intrust Bank, the refinancing of the existing indebtedness owed
to Arvest Bank; and other costs we incurred by Arvest Bank in
connection with the preparation of the loan documents, subject
to approval by Arvest Bank.
The proceeds of the Acquisition Line are to be used solely for
the funding of up to 70% of either the purchase price of the
acquisition of existing pharmacy business assets or sleep
testing facilities or the startup costs of new sleep centers and
other costs incurred by us or Arvest Bank in connection with the
preparation of the Loan Agreement and related documents, subject
to approval by Arvest Bank.
Collateral. Payment and performance of our
obligations under the Arvest Credit Facility are secured by the
personal guaranties of the Guarantors and in general our assets.
If the Company sells any assets which are collateral for the
Arvest Credit Facility, then subject to certain exceptions and
without the consent of Arvest Bank, such sale proceeds must be
used to reduce the amounts outstanding to Arvest Bank.
Debt Service Coverage Ratio. Based on the
latest four rolling quarters, we agreed to continuously maintain
a Debt Service Coverage Ratio of not less than 1.25
to 1. Debt Service Coverage Ratio is, for any period, the ratio
of:
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the net income of Graymark Healthcare (i) increased (to the
extent deducted in determining net income) by the sum, without
duplication, of our interest expense, amortization,
depreciation, and non-recurring expenses as approved by Arvest,
and (ii) decreased (to the extent included in determining
net income and without duplication) by the amount of minority
interest share of net income and distributions to minority
interests for taxes, if any, to
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the annual debt service including interest expense and current
maturities of indebtedness as determined in accordance with
generally accepted accounting principles.
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If we acquire another company or its business, the net income of
the acquired company and the our new debt service associated
with acquiring the company may both be excluded from the Debt
Service Coverage Ratio, at our option.
Compliance with Debt Service Coverage
Ratio. As of September 30, 2010, our Debt
Service Coverage Ratio is less than 1.25 to 1. On
November 12, 2010, Arvest Bank waived the Debt Service
Coverage Ratio requirements for the quarter ending
September 30, 2010 and, subject to payment of certain
amounts from the proceeds of the ApothecaryRx Sale, for the
quarter ended December 31, 2010. We expect to achieve
compliance by March 31, 2011 through a combination of
various strategic, operational and debt reduction strategies,
including the ApothecaryRx Sale. If we are unsuccessful in fully
executing these strategies, there is no assurance that Arvest
Bank will waive or further delay the requirement.
Default and Remedies. In addition to the
general defaults of failure to perform our obligations and those
of the Guarantors, collateral casualties, misrepresentation,
bankruptcy, entry of a judgment of $50,000 or more, failure of
first liens on collateral, default also includes our delisting
by The Nasdaq Stock Market, Inc. In the event a default is not
cured within 10 days or in some case five days following
notice of the default by Arvest Bank (and in the case of failure
to perform a payment obligation for three times with notice),
Arvest Bank will have the right to declare the outstanding
principal and accrued and unpaid interest immediately due and
payable.
Deposit Account Control Agreement. Effective
June 30, 2010, we entered into a Deposit Control Agreement
(Deposit Agreement) with Arvest Bank and Valliance
Bank covering the deposit accounts that
47
we have at Valliance Bank. The Deposit Agreement requires
Valliance Bank to comply with instructions originated by Arvest
Bank directing the disposition of the funds held by us at
Valliance Bank without our further consent. Without Arvest
Banks consent, we cannot close any of our deposit accounts
at Valliance Bank or open any additional accounts at Valliance
Bank. Arvest Bank may exercise its rights to give instructions
to Valliance Bank under the Deposit Agreement only in the event
of an uncured default under the Loan Agreement, as amended.
Financial
Commitments
We do not have any material capital commitments during the next
12 months, but we do have contractual commitments of
approximately $6.8 million for payments on our indebtedness
and for operating lease payments. Although we have not entered
into any definitive arrangements for obtaining additional
capital resources, either through long-term lending arrangements
or equity offering, we continue to explore various capital
resource alternatives to replace our long-term bank indebtedness.
Our future commitments under contractual obligations by expected
maturity date at September 30, 2010 are as follows:
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< 1 year
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1-3 years
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3-5 years
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> 5 years
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Total
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Long-term debt
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$
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1,894,904
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$
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7,065,352
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$
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14,249,540
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$
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3,186,189
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$
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26,395,985
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Operating leases
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1,396,597
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2,136,669
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1,282,201
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2,488,330
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7,303,797
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Long-term debt, discontinued operations
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2,724,633
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8,012,397
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17,138,238
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27,875,268
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Operating leases, discontinued operations
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766,291
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829,508
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468,950
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549,350
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2,614,099
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$
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6,782,425
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$
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18,043,926
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$
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33,138,929
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$
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6,223,869
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$
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64,189,149
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As a condition for the release of liens on the assets to be sold
in the ApothecaryRx Sale, Arvest Bank is requiring us to reduce
the amount of the Credit Facility by $25.0 million from the
proceeds of the ApothecaryRx Sale. To date, we have reduced the
Credit Facility by $22.0 million. We are required to pay
the remaining $3.0 million by January 6, 2011. We are
currently in discussions with Arvest Bank regarding this payment
and our compliance with required financial covenants.
CRITICAL
ACCOUNTING POLICIES
The consolidated condensed financial statements are prepared in
accordance with accounting principles generally accepted in the
United States of America and include amounts based on
managements 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. Some of the more significant estimates
include revenue recognition, allowance for contractual
adjustments and doubtful accounts, and goodwill and intangible
asset impairment. We use the following methods to determine our
estimates:
Revenue
recognition
Sleep center services and product sales from are recognized in
the period in which services and related products are provided
to customers and are recorded at net realizable amounts
estimated to be paid by customers and third-party payers.
Insurance benefits are assigned to us and, accordingly, we bill
on behalf of our customers. In our newly acquired Somni
business, we estimate the net realizable amount based primarily
on the contracted rates stated in the contracts we have with
various payors. We have used this method to determine our net
revenue on the Somni business since the acquisition and do not
anticipate any future changes to this process. In our historic
business, we have been predominantly
out-of-network
and have not had
48
contract rates to use for determining net revenue for a
majority of our payors. For this portion of our business, we
perform a quarterly analysis of actual reimbursement from each
third party payor for the most recent
12-months.
We conduct this analysis for each of our operating locations
separately to ensure differences in payment rates from various
markets are identified in our analysis. In our analysis, we
calculate the percentage actually paid by each third party payor
of the amount billed to determine the applicable amount of net
revenue for each payor at each location. Our key assumption in
this process is that actual reimbursement history is a
reasonable predictor of the future
out-of-network
reimbursement for each payor at each facility. Historically, we
have consistently used this process to estimate net revenue at
the time of service other than a change in fiscal 2009 to using
12 months of payment history. Prior to that time, we used
nine months of payment history for our quarterly analysis.
Although the impact on the calculation was negligible, we
determined a
12-month
review eliminates potential seasonal fluctuations and provides a
broader sample of payments for the calculation. We are in the
process of migrating our historic business to a predominantly
in-network
status by obtaining contracts with our primary payors. For our
diagnostic business, we expect to have this process
substantially complete in the fourth quarter of 2010. For our
therapy business, we expect this process to be substantially
complete in the first quarter of 2011. As contracts are added,
and we become predominantly
in-network
in our historic business, we will estimate net revenue based on
the contracted rates which is the same process and assumption we
currently use for our acquired Somni business. This change in
process and assumption for our historic business is not expected
to have a material impact on future operating results.
For certain sleep therapy and other equipment sales,
reimbursement from third-party payers occurs over a period of
time, typically 10 to 13 months. We recognize revenue on
these sales as payments are earned over the payment period
stipulated by the third-party payor. Insurance benefits are
assigned to us and, accordingly, we bill on behalf of our
customers.
We have established an allowance to account for contractual
adjustments that result from differences between the amount
billed and the expected realizable amount. Actual adjustments
that result from differences between the payment amount received
and the expected realizable amount are recorded against the
allowance for contractual adjustments and are typically
identified and ultimately recorded at the point of cash
application or when otherwise determined pursuant to our
collection procedures. Revenues in the accompanying consolidated
financial statements are reported net of such adjustments.
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 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 our operating
results and cash flows in future periods. Specifically, the
complexity of many third-party billing arrangements and the
uncertainty of reimbursement amounts for certain services from
certain payers may result in adjustments to amounts originally
recorded.
The patient and their third party insurance provider typically
share in the payment for our 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, we are not certain of the full amount of patient
responsibility at the time of service. Starting in 2010, we
implemented a process to estimate amounts due from patients
prior to service and increase collection of those amounts prior
to service. Remaining amounts due from patients are then billed
following completion of service. Based on historic experience,
we expect to collect approximately 41% of unpaid amounts due
from patients after service is provided.
Included in accounts receivable are earned but unbilled
receivables. Unbilled accounts receivable represent charges for
services delivered to customers for which invoices have not yet
been generated by the billing system. Prior to the delivery of
services or equipment and supplies to customers, we perform
certain certification and approval procedures to ensure
collection is reasonably assured and that unbilled accounts
receivable is recorded at net amounts expected to be paid by
customers and third-party payers. Billing delays, ranging from
several weeks to several months, can occur due to delays in
obtaining certain required payer-specific documentation from
internal and external sources, interim transactions occurring
between cycle billing
49
dates established for each customer within the billing system
and new sleep centers awaiting assignment of new provider
enrollment identification numbers. In the event that a
third-party payer does not accept the claim for payment, the
customer is ultimately responsible.
Cost of Services and Sales Cost of services
includes technician labor required to perform sleep diagnostics
and disposable supplies used in providing sleep diagnostics.
Cost of sales includes the acquisition cost of sleep therapy
products sold. Cost of services are recorded in the time period
the related service is provided. Cost of sales are recorded in
the same time period that the related revenue is recognized. If
the sale is paid for over a specified period, the product cost
associated with that sale is recognized over that same period.
If the product is paid for in one period, the cost of sale is
recorded in the period the product was sold.
Accounts Receivable Accounts receivable are
reported net of allowances for contractual adjustments and
doubtful accounts. The majority of our accounts receivable is
due from Medicare, private insurance carriers and other
third-party payors, as well as from customers under co-insurance
and deductible provisions.
Third-party reimbursement is a complicated process that involves
submission of claims to multiple payers, each having its own
claims requirements. Adding to this complexity, a significant
portion of our business is
out-of-network
with several payors, which means we do not have defined
contracted reimbursement rates with these payors. For this
reason, our systems report revenue at a higher gross billed
amount, which we adjust to an expected net amount based on
historic payments. This process results in a reserve for
contractual allowances that is higher than it otherwise would be
if a larger percentage of our business were under contract and
our systems could report revenue at those net contract rates. As
we move more of our business to
in-network
contracting, we expect the level of reserve related to
contractual allowances to decrease. In some cases, the ultimate
collection of accounts receivable subsequent to the service
dates may not be known for several months. As these accounts age
the risk of collection increases and the resulting reserves for
bad debt expense reflect this longer payment cycle. We have
established an allowance to account for contractual adjustments
that result from differences between the amounts billed to
customers and third-party payers and the expected realizable
amounts. The percentage and amounts used to record the allowance
for doubtful accounts are supported by various methods including
current and historical cash collections, contractual
adjustments, and aging of accounts receivable.
We offer payment plans to patients for amounts due from them for
the sales and services we provide. For patients with a balance
of $500 or less, we allow a maximum of six months for the
patient to pay the amount due. For patients with a balance over
$500, we allow a maximum of 12 months to pay the full
amount due. The minimum monthly payment amount for both plans is
$50 per month.
Accounts are written-off as bad debt using a specific
identification method. For amounts due from patients, we utilize
a collections process that includes distributing monthly account
statements. For patients that are not on a payment plan,
collection efforts including collection letters and collection
calls begin at 90 days from the initial statement. If the
patient is on a payment program, these efforts begin
30 days after the patient fails to make a planned payment.
For our diagnostic patients, we submit patient receivables to an
outside collection agency if the patient has failed to pay
120 days following service or, if the patient is on a
payment plan, they have failed to make two consecutive payments.
For our therapy patients, patient receivables are submitted to
an outside collection agency if payment has not been received
between 180 and 270 days following service depending on the
service provided and circumstances of the receivable or, if the
patient is on a payment plan, they have failed to make two
consecutive payments. It is our policy to write-off as bad debt
all patient receivables at the time they are submitted to an
outside collection agency. If funds are recovered by our
collection agency, the amounts previously written-off are
reversed as a recovery of bad debt. For amounts due from third
party payors, it is our policy to write-off an account
receivable to bad debt based on the specific circumstances
related to that claim resulting in a determination that there is
no further recourse for collection of a denied claim from the
denying payor.
Included in accounts receivable are earned but unbilled
receivables. Unbilled accounts receivable represent charges for
services delivered to customers for which invoices have not yet
been generated by the billing system. Prior to the delivery of
services or equipment and supplies to customers, we perform
certain certification and approval procedures to ensure
collection is reasonably assured and that unbilled accounts
50
receivable is recorded at net amounts expected to be paid by
customers and third-party payers. Billing delays, ranging from
several weeks to several months, can occur due to delays in
obtaining certain required payer-specific documentation from
internal and external sources, interim transactions occurring
between cycle billing dates established for each customer within
the billing system and new sleep centers awaiting assignment of
new provider enrollment identification numbers. In the event
that a third-party payer does not accept the claim for payment,
the customer is ultimately responsible.
A summary of the Days Sales Outstanding (DSO) and
managements expectations follows:
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September 30, 2010
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December 31, 2009
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Actual
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Expected
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Actual
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Expected
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Sleep diagnostic business
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49.66
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50 to 55
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51.34
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50 to 55
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Sleep therapy business
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61.93
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55 to 60
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99.76
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100 to 105
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The primary reason for the decrease in expected DSO for sleep
therapy business from 100 to 105 days at December 31,
2009 to 55 to 60 days at September 30, 2010 is the
change in accounting method during 2010 for equipment sales that
are paid for over period of time.
Goodwill and Intangible Assets Goodwill is
the excess of the purchase price paid over the fair value of the
net assets of the acquired business. Goodwill and other
indefinitely-lived intangible assets are not amortized, but are
subject to annual impairment reviews, or more frequent reviews
if events or circumstances indicate there may be an impairment
of goodwill.
Intangible assets other than goodwill which include customer
relationships, customer files, covenants not to compete,
trademarks and payor contracts are amortized over their
estimated useful lives using the straight line method. The
remaining lives range from three to fifteen years. We evaluate
the recoverability of identifiable intangible asset whenever
events or changes in circumstances indicate that an intangible
assets carrying amount may not be recoverable.
Change in Accounting Method On
January 1, 2010, we elected to change our method of revenue
recognition for sleep therapy equipment sales that are paid for
over time (rental equipment) to recognize the
revenue for rental equipment over the life of the rental period
which typically ranges from 10 to 13 months. Prior to the
business acquisitions made in the 3rd quarter of 2009, we
recognized the total amount of revenue for entire rental
equipment period at the inception of the rental period with an
offsetting entry for estimated returns. The entities that were
acquired in 2009 recorded revenue for rental equipment
consistent with method being adopted. Recording revenue for
rental equipment over the life of the rental period will provide
more accurate interim information as this method relies less on
estimates than the previous method in which potential rental
returns had to be estimated.
We have determined that it is impracticable to determine the
cumulative effect of applying this change retrospectively
because historical transactional level records are no longer
available in a manner that would allow for the appropriate
calculations for the historical periods presented. As a result,
we will apply the change in revenue recognition for rental
equipment on a prospective basis. As a result of the accounting
change, our accumulated deficit increased $213,500, as of
January 1, 2010, from $9,689,471, as originally reported,
to $10,082,971.
Recently
Adopted and Recently Issued Accounting Guidance
Adopted
Guidance
Effective January 1, 2010, we adopted changes issued by the
FASB on January 6, 2010, for a scope clarification to the
FASBs previously-issued guidance on accounting for
noncontrolling interests in consolidated financial statements.
These changes clarify the accounting and reporting guidance for
noncontrolling interests and changes in ownership interests of a
consolidated subsidiary. An entity is required to deconsolidate
a subsidiary when the entity ceases to have a controlling
financial interest in the subsidiary. Upon deconsolidation of a
subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the
subsidiary at fair value. The gain or loss includes any gain or
loss associated with
51
the difference between the fair value of the retained
investment in the subsidiary and its carrying amount at the date
the subsidiary is deconsolidated. In contrast, an entity is
required to account for a decrease in its ownership interest of
a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. The adoption of these
changes had no impact on our consolidated financial statements.
Effective January 1, 2010, we adopted changes issued by the
FASB on January 21, 2010, to disclosure requirements for
fair value measurements. Specifically, the changes require a
reporting entity to disclose separately the amounts of
significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons
for the transfers. The changes also clarify existing disclosure
requirements related to how assets and liabilities should be
grouped by class and valuation techniques used for recurring and
nonrecurring fair value measurements. The adoption of these
changes had no impact on our consolidated financial statements.
Effective January 1, 2010, we adopted changes issued by the
FASB on February 24, 2010, to accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or available to be issued,
otherwise known as subsequent events. Specifically,
these changes clarified that an entity that is required to file
or furnish its financial statements with the SEC is not required
to disclose the date through which subsequent events have been
evaluated. Other than the elimination of disclosing the date
through which management has performed its evaluation for
subsequent events, the adoption of these changes had no impact
on our consolidated financial statements.
Issued
Guidance
In October 2009, the FASB issued changes to revenue recognition
for multiple-deliverable arrangements. These changes require
separation of consideration received in such arrangements by
establishing a selling price hierarchy (not the same as fair
value) for determining the selling price of a deliverable, which
will be based on available information in the following order:
vendor-specific objective evidence, third-party evidence, or
estimated selling price; eliminate the residual method of
allocation and require that the consideration be allocated at
the inception of the arrangement to all deliverables using the
relative selling price method, which allocates any discount in
the arrangement to each deliverable on the basis of each
deliverables selling price; require that a vendor
determine its best estimate of selling price in a manner that is
consistent with that used to determine the price to sell the
deliverable on a standalone basis; and expand the disclosures
related to multiple-deliverable revenue arrangements. These
changes become effective for us on January 1, 2011.
Management has determined that the adoption of these changes
will not have an impact on our consolidated financial
statements, as we do not currently have any such arrangements
with our customers.
In January 2010, the FASB issued changes to disclosure
requirements for fair value measurements. Specifically, the
changes require a reporting entity to disclose, in the
reconciliation of fair value measurements using significant
unobservable inputs (Level 3), separate information about
purchases, sales, issuances, and settlements (that is, on a
gross basis rather than as one net number). These changes become
effective for us beginning January 1, 2011. Other than the
additional disclosure requirements, management has determined
these changes will not have an impact on our consolidated
financial statements.
52
OUR
BUSINESS
We are one of the largest providers of care management solutions
to the sleep disorder market based on number of independent
sleep care centers and hospital sleep diagnostic programs
operated in the United States. We provide a comprehensive
diagnosis and care management solution for patients suffering
from sleep disorders.
Sleep
Management Solutions Overview
Our
Sleep Management Market Opportunity
We believe that the market for Sleep Management Solutions is
large and growing with no clear market leader. A number of
factors support the future growth of this market:
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Large and undiagnosed population of patients that suffer from
sleep disorders. There are a substantial number
of undiagnosed patients who could benefit from diagnosis and
treatment of sleep disorders. There are an estimated
40 million Americans that suffer from chronic, long-term
sleep disorders, according to the National Institutes of Health,
or NIH. There are over 80 different sleep disorders,
including obstructive sleep apnea, or OSA, insomnia, narcolepsy
and restless legs syndrome. The primary focus of our business is
OSA, which the National Sleep Foundation estimates occurs in at
least 18 million Americans. Moreover, according to the
American College of Physicians, about
80-90% of
persons with sleep apnea go undiagnosed.
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Increasing awareness of diagnosis and treatment options,
particularly for OSA. We believe there is an
increasing awareness among the U.S. population and
physicians in particular about the health risks and the
availability and benefits of treatment options for sleep
disorders. Of significant importance, OSA can have serious
effects on peoples health and personal lives. OSA is known
to increase the risk for several serious health conditions,
including obesity, high blood pressure, heart disease, stroke,
diabetes, depression and sexual dysfunction. Additionally, OSA
may result in excessive daytime sleepiness, memory loss, lack of
concentration and irritability. OSA and its effects may increase
the risk for automobile accidents and negatively affect work
productivity and personal relationships. In addition, as
physicians become aware of the links between OSA and other
serious health conditions, physicians are increasingly referring
patients for sleep studies.
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Growth in obesity rates. OSA is found in
people of every age and body type, but is most commonly found in
the middle-aged, obese population. Obesity is currently found in
approximately 72 million adults and is a growing problem in
the United States. Obesity exacerbates OSA by enlarging the
upper airway soft tissue structures and narrowing the airway.
Not only does obesity contribute to sleep disorders such as OSA,
but sleep disorders can also contribute to obesity. We believe
individuals suffering from OSA generally have less energy and
ability to exercise or keep a strict diet. Medical studies have
also shown that sleep disorders can impair metabolism and
disrupt hormone levels, promoting weight gain.
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Large aging population. An aging
U.S. population, led by approximately 78 million
baby-boomers, is becoming increasingly at risk for OSA. As their
soft palates enlarge, their pharyngeal fat pads increase in size
and the shape of bony structures around the airway change.
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We believe these factors present a significant business
opportunity for us because we provide a complete continuum of
care for those who suffer from OSA from initial
diagnosis to treatment with a continuous positive airway
pressure, or CPAP, device to providing ongoing CPAP supplies and
long-term
follow-up
care.
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The amount being spent on sleep disorder diagnosis and treatment
is increasing. A 2005 Frost & Sullivan report
estimated the U.S. sleep diagnostic market was
$1.6 billion in 2004, and that it will grow to
$4.4 billion by 2011.
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The sleep diagnostic market is highly fragmented. Our presence
as one of the largest overall providers of sleep diagnostic
services with 25 independent sleep care centers and
73 hospital sleep diagnostic programs, out of a total we
estimate includes over 3,000 sleep clinics in the United
States, illustrates
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the level of fragmentation in the market. Only a limited number
of companies provide a comprehensive solution which includes
initial diagnosis to treatment with a CPAP device to providing
ongoing CPAP supplies to long-term
follow-up
care.
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Our
Sleep Management Solution
Our sleep management solution is driven by our clinical approach
to managing sleep disorders. Our clinical model is led by our
staff of medical directors who are board-certified physicians in
sleep medicine, who oversee the entire life cycle of a sleep
disorder from initial referral through continuing care
management. Our approach to managing the care of our patients
diagnosed with OSA is a key differentiator for us. We believe
our overall patient CPAP usage compliance rate, as articulated
by the Medicare Standard of compliance requirements, is
approximately 80%, compared to a national compliance rate of
between 17 and 54%. Five key elements support our clinical
approach:
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Referral: Our medical directors, who are
board-certified physicians in sleep medicine, have forged strong
relationships with referral sources, which include primary care
physicians, as well as physicians from a wide variety of other
specialties and dentists.
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Diagnosis: We own and operate sleep testing
clinics that diagnose the full range of sleep disorders
including OSA, insomnia, narcolepsy and restless legs syndrome.
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CPAP Device Supply: We sell CPAP devices,
which are used to treat OSA.
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Re-Supply: We offer a re-supply program for
our patients and other CPAP users to obtain the required
components for their CPAP devices that must be replaced on a
regular basis.
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Care Management: We provide continuing care to
our patients led by our medical directors who are
board-certified physicians in sleep medicine and their staff.
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Our clinical approach increases the long-term compliance of our
patients, and enables us to manage a patients sleep
disorder care throughout the lifecycle of the disorder, thereby
allowing us to generate a long-term, recurring revenue stream.
We generate revenues via three primary sources: providing the
diagnostic tests and related studies for sleep disorders through
our sleep diagnostic centers, the sale of CPAP devices, and the
ongoing re-supply of components of the CPAP device that need to
be replaced. In addition, as a part of our ongoing care
management program, we monitor the patients sleep disorder
and as the patients medical condition changes, we are paid
for additional diagnostic tests and studies.
In addition, we believe that our clinical approach to
comprehensive patient care, provides higher quality of care and
achieves higher patient compliance. We believe that higher
compliance rates are directly correlated to higher revenue
generation per patient compared to our competitors through
increased utilization of our resupply or PRSP program and a
greater likelihood of full reimbursement from federal payors and
those commercial carriers who have adopted federal payor
standards.
Referral
and Diagnosis
Patients at risk for, or suspected of suffering from, a sleep
disorder are referred to one of our sleep clinics by independent
physicians, dentists, group practices, or self-referrals. At our
independent sleep care centers and hospital sleep diagnostic
programs, which we refer to as our sleep clinics, we administer
an overnight polysomnogram, or sleep study, to determine if our
patients suffer from a sleep disorder. Our medical directors
provide a diagnosis and comprehensive report to the referring
physician based on analysis of the patients sleep study
results.
CPAP
Device Supply
If the physician determines the patient suffers from OSA
following the review of the sleep study results, then the
patient is generally prescribed the American Academy of Sleep
Medicines, or AASM, preferred method of treatment, which
is with a CPAP, device. Patients return to our clinic for an
overnight study to determine the optimal air pressure to
prescribe with the CPAP device. Sometimes, both the diagnosis
and air
54
pressure study are done in one night. Effective January 1,
2010, regulatory restrictions prevent Medicare from making
payments to sleep diagnostics centers that sell CPAP devices
unless the diagnosis has been made by a medical director who is
board-certified in sleep medicine or who meets other specified
criteria. All of the sleep studies we conduct, except for those
conducted at one of our non-accredited centers, qualify us to
receive Medicare reimbursement for the sale of CPAP devices.
Re-supply
In addition to selling CPAP devices to people with OSA, we offer
our patient reorder supply program, or PRSP. The PRSP
periodically supplies the components of the CPAP device that
must be regularly replaced (such as masks, hoses, filters, and
other parts) to our patients and other CPAP users. This enables
them to better maintain their CPAP devices, increasing the
probability of ongoing compliance and a better long-term
clinical outcome and providing us with a long-term recurring
revenue stream.
Care
Management
Our thorough wellness and continuing care program led by our
medical staff provides the greatest opportunity for our patients
to use their CPAP devices properly and stay compliant. After the
initial CPAP device
set-up, our
clinical staff contacts the patient regularly during the initial
six months (at 48 hours, two weeks, two months and six
months) and each six months thereafter to enhance patient
understanding and to ensure the greatest chance for the short-
and long-term success for the patient. Most importantly, where
we have the program in place, our medical staff has an in-person
visit with the patient and their CPAP device approximately
45 days after the initial
set-up. The
purpose of the visit is to verify initial compliance and to
enhance compliance by assuring proper fit and feel of the CPAP
device (usually the mask), determining if there are any medical
impediments to compliance (such as untreated allergies), and
answering any questions about the operation or care of the
equipment. We also work closely with the patients
physicians to aid in their
follow-up
care and monitoring of the treatment.
Recently, as the public and medical communities have become
increasingly aware of the sleep diagnostic and treatment
markets, federal and state lawmakers and regulators have taken a
greater interest in implementing stricter criteria to ensure a
high standard of care. Beginning in 2009, federal payors, and
commercial carriers who have adopted similar standards, will
only pay CPAP providers for equipment over a
13-month
period in equal installments. Payment is stopped if the CPAP
provider can not document patient compliance levels that meet
their established standards within the first 90 days after
the initial
set-up. We
believe that our clinical approach provides us with higher
patient compliance (80%) than the national compliance rate
(17-54%),
more often resulting in full reimbursement from these payors.
ApothecaryRx
Overview
As of September 30, 2010, we owned and operated
18 retail pharmacies located in Colorado, Illinois,
Missouri, Minnesota, and Oklahoma. On December 6, 2010, we
completed the sale of substantially all of the assets of
ApothecaryRx to Walgreens. See
ApothecaryRx Discontinued
Operations for more information on our sale of
ApothecaryRxs assets and ApothecaryRxs historical
business of independent retail pharmacies.
Our
Growth Strategy
We intend to grow our SMS business as a provider of sleep
diagnostic services and care management for sleep disorders. The
following are the key elements of our growth strategy:
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Expand sleep diagnostic and care management capabilities
through strategic acquisitions. We intend to
drive growth primarily by acquiring successful sleep clinics in
our existing geographic markets and by expanding into new
markets. We believe that we are well-positioned to acquire and
successfully integrate sleep clinics because of our size, our
experienced management team, and our knowledge of the regulatory
environment. Our scale allows us to provide central services to
our sleep clinics, which create economic synergies across
acquired sleep clinics and reduces our operating costs per
clinic. We
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expect to focus our acquisition opportunities on large
diagnostic clinics that will be accretive to our earnings and
that have not previously provided, or have not maximized the
opportunity for providing, comprehensive services to their
patients. We expect to add our care management and ongoing
re-supply services to existing high volume diagnostic services
to generate additional revenues. Through acquisitions, we intend
to continue to standardize and integrate billing, human
resources, purchasing and IT systems, diversify our payor rates
through expansion into different geographic markets and promote
best clinical and operational practices across each of our sleep
clinics. Over the past three years, we have completed four
acquisitions of sleep companies, each with multiple locations,
raising the total number of independent sleep care centers we
own and/or
operate to 25 and the total number of hospital sleep diagnostic
programs to 73.
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Drive internal growth in our Sleep Management Solutions
segment. We use marketing initiatives to increase
the awareness of sleep disorders and their negative health
effects, as well as to promote our comprehensive solution to
those that suffer from sleep disorders in the markets we serve.
We also use direct marketing representatives to identify
strategic hospital and physician group alliances and to market
our sleep diagnostic services and care management alternatives
to area physicians. We believe that these initiatives, along
with a growing, underserved primary target demographic, will
increase utilization rates at our sleep clinics and drive
revenue growth. We intend to increase referrals from
non-traditional sources, including a focus on self-pay customers
and corporate customers. We believe that corporate payors in a
number of industries, such as trucking and other common
carriers, could benefit from the diagnosis and treatment of
sleep disorders of their employees. In addition, based on our
understanding of and compliance with heightened regulatory
requirements, we believe that we will be able to expand our
business more easily than other independent sleep care centers.
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Expand on-going care management and disposable re-supply
program. Generally OSA is a long-term chronic
disorder, and patients being treated for OSA are generally
treated for life. With our comprehensive model of care, ability
to improve patient compliance with therapy, and scale, we are
able to maintain a long-term, diversified, recurring revenue
stream. We provide our patients with an ongoing supply of
disposable supplies for their therapy as well as periodic
replacement of their CPAP devices. Since our PRSP was initiated
in 2009, approximately 70% of our patients have enrolled into
the PRSP at the time they were equipped with a CPAP device.
After we acquire a sleep center, we are generally successful in
enrolling existing patients into our PRSP. In addition, by
virtue of our long-term approach to managing a patients
sleep disorder, patients periodically undergo additional
diagnostic tests and CPAP pressure optimization.
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Company
History
We were formed on January 2, 2008, when our predecessor
company, Graymark Productions Inc., acquired ApothecaryRx, LLC,
and SDC Holdings, LLC, collectively referred to as the
Graymark Acquisition. For financial reporting
purposes, Graymark was deemed acquired by ApothecaryRx, LLC and
SDC Holdings, LLC and, accordingly, the historical financial
statements prior to December 31, 2007 are those of
ApothecaryRx, LLC and SDC Holdings, LLC as adjusted for the
effect of the Graymark Acquisition. In conjunction with the
Graymark Acquisition, all former operations of Graymark
Productions were discontinued. On December 6, 2010, we
completed the sale of substantially all of the assets of
ApothecaryRx. As a result of the sale of ApothecaryRxs
assets, the related assets, liabilities, results of operations
and cash flows of ApothecaryRx have been classified as
discontinued operations. Over the last three years, we have
acquired four sleep businesses, raising the total number of
sleep clinics we own
and/or
operate to 25 independent sleep care centers, and
73 hospital sleep diagnostic programs in 11 states:
Oklahoma, Texas, Nevada, Kansas, Nebraska, South Dakota,
Minnesota, Iowa, Missouri, New York and Florida.
On March 13, 2008, our Board of Directors approved a
reverse split of our common stock at a ratio of
one-for-five
shares. The effective date of the reverse split was
April 11, 2008.
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Specifically, during the period from January 1, 2008 to
September 30, 2010, our SMS business completed the
following acquisitions:
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Acquisition
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Business
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Acquired
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April 2008
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Minority interests in sleep centers
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June 2008
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Sleep Center of Waco, Ltd.; Assets of Plano Sleep Center, Ltd.;
Assets of Southlake Sleep Center, Ltd.
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June 2008
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Nocturna Sleep Center, LLC
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August 2009
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somniCare, Inc.
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August 2009
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somniTech, Inc.
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September 2009
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Avastra Eastern Sleep Center, Inc.
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Sleep
Clinics and Care Management
Our SMS business provides a comprehensive diagnosis, and care
management solution for the growing population of Americans with
sleep disorders. Patients at risk for, or suspected of suffering
from, a sleep disorder are referred to one of our sleep clinics
by independent physicians, dentists, group practices, or
self-referrals that generally come from our reputation in the
community and our marketing and advertising efforts. Our sleep
clinics typically consist of two to eight bed facilities and are
overseen by our medical directors. At our sleep clinics, we
administer an overnight polysomnogram, or sleep study, to our
patients, which monitors blood oxygen level, heart rate,
respiratory function, brain waves, leg movement and other vital
signs through small and painless electrical sensors applied to
the patient. We compile this information into a detailed sleep
report which includes an interpretation of the data and
diagnosis by our medical director.
If the physician determines the patient suffers from OSA, the
most commonly diagnosed sleep disorder, the patient is generally
prescribed the AASMs preferred method of treatment, which
is a CPAP device. A CPAP device is a nasal or facial mask
connected by a tube to a small portable airflow generator that
delivers compressed air at a prescribed continuous positive
pressure. The continuous air pressure acts as a pneumatic splint
to keep the patients upper airway open and unobstructed,
resulting in a smooth breathing pattern and the reduction or
elimination of other symptoms associated with OSA, including
loud snoring. Patients return to our clinic for an additional
study to determine the optimal air pressure to prescribe with
the patients CPAP device. For certain patients, we may
perform a split-night study, with the first half of the night
being used to perform the initial diagnosis and the second half
of the night being used to determine the optimal air pressure
setting for that patients CPAP device.
After completion of the sleep study and pressure setting
process, the patient can purchase a CPAP device from us. The
initial CPAP device
set-up for
those patients that purchase a CPAP device from us typically
occurs at the clinic where the patient received its sleep study.
Our clinical staff contacts the patient by phone two days, two
weeks, two months, six months and each six months thereafter. We
question each patient on their compliance, their product
satisfaction and their need for additional supplies. We work
with these patients to ensure that they are satisfied with the
fit of their mask. Our medical staff has a meeting with each new
CPAP device user approximately 45 days after receipt of the
device. At that meeting, we download actual patient compliance
data from their CPAP device, determine the true compliance
to-date and take steps to ensure the greatest chance for
long-term success for the patient, including additional medical
intervention, if necessary. We believe that this continuing
contact with the patient separates us from our competition,
helps raise patient compliance and ultimately results in patient
satisfaction. We also work closely with the patients
physician to aid in
follow-up
care and monitoring of the treatment. In addition to selling
CPAP devices to patients with OSA, we offer a program by which
patients can routinely receive the components of the CPAP device
that must be regularly replaced (such as masks, hoses, filters
and other parts). Our patient reorder supply program, or PRSP,
is offered through our Nocturna Sleep Therapy business. The PRSP
periodically supplies the disposable components of the CPAP
system to our patients, which enables them to better maintain
their CPAP devices for a better patient outcome and provides us
with a long-term recurring revenue stream. Typically there is a
need for replacement parts in three or six month increments. We
use insurance
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recommendations to determine the timing on shipments. We believe
our PRSP program also assists in the long-term success of our
patients. We believe that our compliance monitoring programs
exceed industry standard practices. For example, we are not
aware of any national competitor for CPAP equipment that has
dedicated medical personnel that offer such in-person care. The
majority of our competitors ship the CPAP device to the
patients house with no regularly scheduled in-person
contact with dedicated medical staff. We believe that our
continuing care management positions us well as federal payors
have implemented standards which require proof of CPAP
compliance prior to payment beyond three months of treatment,
and increasingly, commercial carriers are adopting similar
standards.
Sleep
Disorders Obstructive Sleep Apnea
There are over 80 different sleep disorders, including
obstructive sleep apnea, or OSA, insomnia, narcolepsy and
restless legs syndrome. The most common diagnosis for patients
at sleep medicine centers is OSA, a sleep disorder, which the
National Sleep Foundation estimates occurs in at least
18 million Americans. OSA occurs when the soft tissue in
the rear of the throat narrows and repeatedly closes during
sleep, causing the body to temporarily stop breathing. Those
that suffer from OSA typically have an apnea-hypopnea index, or
AHI, which represents the average number of times they stop
breathing per hour during the night, of five or more. These
frequent episodes can have a serious, deleterious effect on the
health and personal lives of those with OSA. OSA is known to
increase the risk for obesity, high blood pressure, heart
disease, stroke, diabetes, depression and sexual dysfunction,
among other negative health conditions. Additionally, OSA may
result in excessive daytime sleepiness, memory loss, lack of
concentration and irritability, all of which can increase the
risk for automobile accidents and negatively affect work
productivity and personal relationships.
OSA is most commonly found in obese men over the age of 40, but
it can also occur in men and women of all ages and body types.
The National Center for Health Statistics, or a NCHS, estimates
that in
2005-2006
more than one-third of U.S. adults, or over 72 million
people, were obese. According to the Centers for Disease Control
and Prevention, or CDC, study obesity-related diseases accounted
for over 9% of all U.S. medical spending in 2008, or over
$147 billion, roughly double the amount spent in 1998. The
rate of obesity in the United States is increasing at an
alarming rate. Obesity increases the size of the upper airway
soft tissue structures, narrowing the airway and increasing the
risk of OSA. Not only does obesity contribute to sleep problems
such as sleep apnea, but sleep problems can also contribute to
obesity. We believe individuals suffering from OSA generally
have less energy and motivation to exercise or keep a healthy
diet. Studies have also shown that sleep disorders can impair
metabolism and disrupt hormone levels, promoting weight gain.
Additionally, an aging American population, led by approximately
78 million baby-boomers, is becoming increasingly at risk
for OSA as their soft palates gets longer, their pharyngeal fat
pads increase in size and the shape of bony structures around
the airway change.
OSA is most commonly treated with the use of a CPAP device, the
AASMs preferred method of treatment. Other treatment
alternatives include surgery, which is generally used when
non-surgical alternatives fail, oral appliances, which are most
commonly used in mild to moderate OSA, or nasal devices.
Sleep
Disorder Product Supplier Relationships
We purchase our sleep disorder and CPAP devices from Nelcor
Puritan Bennet LLC, Fisher & Paykell Appliances
Limited, Respironics Inc., ResMed Inc. and others. We maintain a
limited inventory of sleep disorder products to lessen the
impact of any temporary supply disruption.
Our ability to sell sleep disorder products is restricted by
strict federal regulations that prohibit us from diverging from
a physicians prescription. If a physician prescribes a
sleep disorder product by name other than one of the products we
offer, we are prohibited by federal regulations from
substituting a different sleep disorder product.
Sleep
Management Solutions Advertising and Promotion
We frequently promote sleep awareness issues and our sleep
testing facilities through radio commercials, billboard
displays, print media and other marketing efforts. Our clinics
also have a strong presence at local
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health fairs and other public events. We use direct marketing
representatives to market to area physicians about our sleep
services. Our medical directors are involved in promoting the
clinics through local and regional public educational seminars,
physician continuing education programs and through individual
meetings with referring physicians and hospitals.
Sleep
Management Solutions Management Information Systems
We employ an integrated sleep diagnostic and management
information system to perform our sleep diagnostic studies. This
system provides secure transfer of sleep diagnostic study
results and other information from sleep studies to the
appropriate physicians and corporate personnel. We also employ
an integrated scheduling and medical billing information system
which allows for optimal utilization of available beds for sleep
studies, optimizes labor scheduling, and streamlines information
transfer for insurance and patient billing. We also utilize an
enterprise reporting and planning system to track and report
both our financial performance and operational metrics, allowing
us to provide timely management information on the performance
of our sleep centers and overall business.
Sleep
Disorder Diagnostic and Care Management Competition
Competition within the sleep disorder diagnostic and care
management market is intense. We face competition in each area
of our sleep management solutions segment.
Sleep Diagnostics. In the sleep diagnostics
business we compete primarily with independent sleep care
centers, hospital sleep diagnostic programs and with home
testing services. Competition in the sleep diagnostic market is
primarily based on market presence and reputation, price,
quality, patient or client service, and achieved treatment
results. We believe that our services and products compete
favorably with respect to these alternatives as we offer
patients the option of participating in our clinics as well as
resupply and continuing care program, in addition to diagnosis
in one of our clinics.
We also compete with providers of home sleep diagnostic tests.
In a home sleep test, patients are attached to a portable
monitoring device overnight while sleeping in their own bed. We
believe that home sleep tests have several limitations compared
to overnight sleep tests in a clinic. Home sleep tests are
administered in the absence of a trained technician who, when
present, is able to correct or make equipment adjustments. In
many of our clinics or facilities we have the capabilities to
pre-screen patients in a clinic under physician-supervised care,
which provides the opportunity to test in the most conducive
environment for our patients. Inherent limitations exist in home
diagnostics, as the optimal pressure to be prescribed for a CPAP
device still must be performed in a clinical setting. We
periodically evaluate additional opportunities to expand and
improve patient access and care including home testing.
Treatment Alternatives. Currently, the
AASMs preferred method of treatment for OSA is a CPAP
device. Alternative treatments for OSA include surgery, oral
appliances and nasal devices. In addition, pharmaceuticals may
be prescribed for other sleep disorders where they offer a
clinical benefit such as for insomnia, narcolepsy and restless
legs syndrome.
CPAP Device Supply. We compete with durable
medical equipment, or DME, providers, whether national, regional
or local when providing CPAP devices. These DME providers
include Apria Healthcare and Lincare Holdings. The purchase of a
CPAP device is allowed by prescription only. While we believe
most DME providers drop ship CPAP devices to the patients
home, we assist the patient with the
set-up of
the machine at one of our sleep centers. We work with the
patient to ensure proper calibration of the CPAP device as well
as proper fit and comfort of the mask.
CPAP Supplies. We compete with DME providers
as well as
e-commerce
web sites for supplying patients with the masks, hoses and
filters that must be periodically replaced. We seek to have
patients who utilize us for diagnostic and therapy services
registered with our patient resupply program, or PRSP, to
periodically receive supplies for their CPAP device. We believe
that our PRSP provides a convenient way for these patients to
obtain their periodic supply.
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Intellectual
Property
In the course of our operations, we develop trade secrets and
trademarks that may assist in maintaining any developed
competitive position. When determined appropriate, we may
enforce and defend our developed and established trade secrets
and trademarks. In an effort to protect our trade secrets, we
require certain employees, consultants and advisors to execute
confidentiality and proprietary information agreements upon
commencement of employment or consulting relationships with us.
Government
Regulation
Our operations are and will be subject to extensive federal,
state and local regulations. These regulations cover required
qualifications,
day-to-day
operations, reimbursement and documentation of activities. We
continuously monitor the effects of regulatory activity on our
sleep center operations.
Licensure
and Accreditation Requirements
The diagnosis of sleep disorders is a component of the practice
of medicine. We engage physicians as independent contractors or
employees to provide professional services and serve as medical
directors for the sleep centers. The practice of medicine is
subject to state licensure laws and regulations. We ensure that
our affiliated physicians are appropriately licensed under
applicable state law. If our affiliated physicians lose those
licenses, our business, financial condition and results of
operations may be negatively impacted.
Corporate Practice of Medicine. Generally,
state laws prohibit anyone but duly licensed physicians from
exercising control over the medical judgments or decisions
rendered by other physicians. This is commonly referred to as
the corporate practice of medicine doctrine. States
vary widely in the interpretation of the doctrine. Some states
permit a business entity (such as a regular business corporation
or limited liability company) to hold, directly or indirectly,
contracts for the provision of medical services, including the
performance
and/or
interpretation of diagnostic sleep studies, and to own a medical
practice that provides such services, as long as only physicians
exercise control over the medical judgments or decisions of
other physicians. Other states, including states such as New
York, Illinois, Texas, California, have more specific and
stringent prohibitions. In such states, the medical practice in
which a physician is employed or engaged as an independent
contractor must itself be licensed or otherwise qualified to do
business as a professional entity (and owned exclusively by
physicians who are licensed to practice medicine in the state)
or as a licensed diagnostic and treatment facility. Failure to
comply with these laws could have material and adverse
consequences, including the judicially sanctioned refusal of
third-party payors to pay for services rendered, based upon
violation of a statute designed to protect the public, as well
as civil or criminal penalties. We believe that we are in
compliance with the corporate practice of medicine laws in each
state in which our sleep centers operate. We do not exercise
control over the medical judgments or decisions of our
affiliated physicians. While we believe we are in compliance
with the requirements of the corporate practice of medicine laws
in each state where our sleep centers are located, these laws
and their interpretations are continually evolving and may
change in the future. Moreover, these laws and their
interpretations are generally enforced by state courts and
regulatory agencies that have broad discretion in their
enforcement.
Fee Splitting. Generally, state laws prohibit
a physician from splitting fees derived from the practice of
medicine with anyone else. We believe that the management,
administrative, technical and other nonmedical services we
provide to each of our sleep centers for a service fee does not
constitute fee splitting. However, these laws and their
interpretations also vary from state to state and are also
enforced by state courts and regulatory authorities that have
broad discretion in their enforcement.
If our arrangements with our affiliated physicians or our sleep
centers are found to violate state laws prohibiting the practice
of medicine by general business entities or fee splitting, our
business, financial condition and ability to operate in those
states could be adversely affected.
With respect to our sleep centers, there has been a trend
developing to require facilities that provide sleep diagnostic
testing to become accredited by the American Academy of Sleep
Medicine (AASM) or The Joint Commission, as well as additional
credentialing for physicians diagnosing sleep studies and the
licensing of
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technical personnel to perform diagnostic testing procedures.
As of November 15, 2010, 14 of our free standing sleep
centers have been accredited by the AASM. Another three free
standing sleep centers are accredited through The Joint
Commission. We are actively working on having our remaining
sleep centers accredited. We believe we will achieve full
accreditation for these centers by mid-2011. Additionally, as of
September 30, 2009, Medicare required that all Durable
Medical Equipment (DME) suppliers be accredited with the
exception of pharmacies whose deadline was extended to
January 1, 2010. As of June 15, 2010, all of our sleep
therapy facilities providing DME were granted accreditation by
The Joint Commission or by the Accreditation Commission for
Healthcare (ACHC).
Medicare
and Medicaid
Our sleep centers operate under regulatory and cost containment
pressures from federal and state legislation primarily affecting
Medicaid and Medicare.
In order to submit claims directly to Medicare for
reimbursement, our centers must be enrolled as independent
diagnostic testing facilities, or IDTFs. Some of our centers are
not enrolled as IDTFs and do not accept Medicare patients for
testing. Our centers that are not enrolled as IDTFs may perform
sleep studies for Medicare patients if the center enters into a
contract with a hospital to perform the studies under
arrangements for the hospital, in which case the hospital
bills Medicare under its own provider number. Enrollment as an
IDTF or the performance of services under
arrangements for hospitals requires compliance with
numerous regulations, and the failure to comply with applicable
requirements could result in revocation of an IDTF enrollment or
the ineligibility of the hospital to obtain reimbursement for
services performed on its behalf by one of our centers.
Additionally, not all private health plans permit services to be
performed by our sleep centers under arrangements for a hospital.
In some locations, we supply CPAP devices and other DME to sleep
studies patients who are diagnosed with sleep disorders, as
ordered by a physician. Medicare suppliers of DME, prosthetics,
orthotics and supplies, or DMEPOS, unless exempt, must be
accredited and secure a surety bond.
Medicare generally prohibits a physician who performs a covered
medical service from reassigning to anyone else the
performing physicians right to receive payment directly
from Medicare, except in certain circumstances. We believe we
satisfy one or more of the exceptions to this prohibition.
The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate
adjustments, administrative rulings, executive orders and
freezes and funding restrictions, all of which may significantly
impact our sleep center operations. There is no assurance that
payments for sleep testing services and DME under the Medicare
and Medicaid programs will continue to be based on current
methodologies or even remain similar to present levels. We may
be subject to rate reductions as a result of federal or state
budgetary constraints or other legislative changes related to
the Medicare and Medicaid programs.
We receive reimbursement from government sponsored third-party
plans, including Medicaid and Medicare, non-government
third-party plans, including managed-care organizations, and
also directly from individuals, or private-pay. For the nine
months ended September 30, 2010, our sleep center payor
mix, as a percentage of total sleep center revenues, was
approximately 77% commercial insurance, 21% Medicaid/Medicare
and 1% private-pay. During 2009, our sleep center payor mix, as
a percentage of total sleep center revenues, was approximately
78% commercial insurance, 18% Medicaid/Medicare and 4%
private-pay. Pricing for private-pay patients is based on
prevailing regional market rates.
In addition to requirements mandated by federal law, individual
states have substantial discretion in determining
administrative, coverage, eligibility and reimbursement policies
under their respective state Medicaid programs that may affect
our sleep center operations.
Fraud and
Abuse Laws
We are subject to federal and state laws and regulations
governing financial and other arrangements among healthcare
providers. Commonly referred to as the Fraud and Abuse laws,
these laws prohibit certain
61
financial relationships between pharmacies, physicians, vendors
and other referral sources. During the last several years, there
has been increased scrutiny and enforcement activity by both
government agencies and the private plaintiffs bar
relating to pharmaceutical marketing practices under the Fraud
and Abuse laws. Violations of Fraud and Abuse laws and
regulations could subject us to, among other things, significant
fines, penalties, injunctive relief, pharmacy shutdowns and
possible exclusion from participation in federal and state
healthcare programs, including Medicare and Medicaid.
Additionally, in its Fiscal Year 2010 Work Plan, the Office of
Inspector General of the Department of Health and Human Services
identified that it would study the appropriateness of Medicare
payments for polysomnography and assess provider compliance with
federal program requirements. Changes in healthcare laws or new
interpretations of existing laws may significantly affect our
business. Some of the Fraud and Abuse Laws that have been
applied are discussed below.
Federal and State Anti-Kickback
Statutes: The federal anti-kickback statute,
Section 1128B(b) of the Social Security Act (42 U.S.C.
1320a-7b(b)),
prohibits, among other things, the knowing and willful offer,
payment, solicitation or acceptance of remuneration, directly or
indirectly, in return for referring an individual to a provider
of services for which payment may be made in whole or in part
under a federal healthcare program, including the Medicare or
Medicaid programs. Remuneration has been interpreted to include
any type of cash or in-kind benefit, including the opportunity
to participate in investments, long-term credit arrangements,
gifts, supplies, equipment, prescription switching fees, or the
furnishing of business machines. Several courts have found that
the anti-kickback statute is violated if any purpose of the
remuneration, not just the primary purpose, is to induce
referrals.
Potential sanctions for violations of the anti-kickback statute
include felony convictions, imprisonment, substantial criminal
fines and exclusion from participation in any federal healthcare
program, including the Medicare and Medicaid programs.
Violations may also give rise to civil monetary penalties in the
amount of $50,000, plus treble damages.
Similarly, many state laws prohibit the solicitation, payment or
receipt of remuneration in return for, or to induce, the
referral of patients to private as well as government programs.
Violation of these anti-kickback laws may result in substantial
civil or criminal penalties for individuals or entities
and/or
exclusion from participating in federal or state healthcare
programs.
Although we believe that our relationships with vendors,
physicians, and other potential referral sources comply with
Fraud and Abuse laws, including the federal and state
anti-kickback statutes, the Department of Health and Human
Services has acknowledged in its industry compliance guidance
that many common business activities potentially violate the
anti-kickback statute. There is no assurance that a government
enforcement agency, private litigant, or court will not
interpret our business relations to violate the Fraud and Abuse
laws.
The False Claims Act: Under the False
Claims Act, or FCA, civil penalties may be imposed upon any
person who, among other things, knowingly or recklessly submits,
or causes the submission of false or fraudulent claims for
payment to the federal government, for example in connection
with Medicare and Medicaid. Any person who knowingly or
recklessly makes or uses a false record or statement in support
of a false claim, or to avoid paying amounts owed to the federal
government, may also be subject to damages and penalties under
the FCA.
Furthermore, private individuals may bring whistle
blower (qui tam) suits under FCA, and
may receive a portion of amounts recovered on behalf of the
federal government. These actions must be filed under seal
pending their review by the Department of Justice. Penalties of
between $5,500 and $11,000 and treble damages may be imposed for
each violation of FCA. Several federal district courts have held
that FCA may apply to claims for reimbursement when an
underlying service was delivered in violation of other laws or
regulations, including the anti-kickback statute.
In addition to FCA, the federal government has other civil and
criminal statutes that may be utilized if the Department of
Justice suspects that false claims have been submitted. Criminal
provisions that are similar to FCA provide that if a corporation
is convicted of presenting a claim or making a statement that it
knows to be false, fictitious or fraudulent to any federal
agency, it may be fined not more than twice any pecuniary gain
62
to the corporation, or, in the alternative, no more than
$500,000 per offense. Many states also have similar false claims
statutes that impose liability for the types of acts prohibited
by FCA. Finally, the submission of false claims may result in
termination of our participation in federal or state healthcare
programs. Members of management and persons who actively
participate in the submission of false claims can also be
excluded from participation in federal healthcare programs.
Additionally, some state statutes contain prohibitions similar
to and possibly even more restrictive than the FCA. These state
laws may also empower state administrators to adopt regulations
restricting financial relationships or payment arrangements
involving healthcare providers under which a person benefits
financially by referring a patient to another person.
We believe that we have sufficient procedures in place to
provide for the accurate completion of claim forms and requests
for payment. Nonetheless, given the complexities of the Medicare
and Medicaid programs, we may code or bill in error, and such
claims for payment may be treated as false claims by the
enforcing agency or a private litigant.
Physician Self-Referral
Prohibitions. The federal physician
self-referral statute, known as the Stark law,
prohibits a physician from making a referral of Medicare
beneficiaries for certain designated health services, including
outpatient prescription drugs and DME (including CPAPs), to any
entity with which the physician has a financial relationship,
unless there is an exception in the law that allows the
referral. Sleep studies are not designated health services
unless they are performed under arrangements for a hospital and
billed by the hospital. The entity that receives a prohibited
referral from a physician may not submit a bill to Medicare for
that service. Federal courts have ruled that a violation of the
Stark statute, as well as a violation of the federal
anti-kickback law described above, can serve as the basis for an
FCA suit. Many state laws prohibit physician referrals to
entities with which the physician has a financial interest, or
require that the physician provide the patient notice of the
physicians financial relationship before making the
referral. Violation of the Stark law can result in substantial
civil penalties for both the referring physician and any entity
that submits a claim for a healthcare service made pursuant to a
prohibited referral. We believe that all of our customer
arrangements are in compliance with the Stark law. However,
these laws could be interpreted in a manner inconsistent with
our operations. Federal or state self-referral regulation could
impact our arrangements with certain physician investors or
independent contractors.
Medicare Anti-Markup Rule. CMS has
recently finalized certain anti-markup rules relating to
diagnostic tests paid for by the Medicare program. The
anti-markup rules are generally applicable where a physician or
other supplier bills for the technical component or professional
component of a diagnostic test that was ordered by the physician
or other supplier (or ordered by a party related to such
physician or other supplier through common ownership or
control), and the diagnostic test is performed by a physician
that does not share a practice with the billing physician or
other supplier. If the anti-markup rule applies to a diagnostic
test, then the reimbursement provided by Medicare to a billing
physician or other supplier for that transaction may be limited.
Because our sleep labs bill Medicare for the technical and
professional fees of sleep diagnostic tests that are ordered by
community physicians or our affiliated physicians, we believe
that the anti-markup rule does not apply to the professional
services our affiliated physicians perform or the technical
services that our sleep labs perform.
Healthcare
Information Practices
The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, sets forth standards for electronic transactions;
unique provider, employer, health plan and patient identifiers;
security and electronic signatures as well as privacy
protections relating to the exchange of individually
identifiable health information. The Department of Health and
Human Services, or DHHS, has released several rules mandating
compliance with the standards set forth under HIPAA. We believe
our sleep centers achieved compliance with DHHSs standards
governing the privacy of individually identifiable health
information and DHHSs standards governing the security of
electronically stored health information. In addition, we have
fully implemented the required uniform standards governing
common healthcare transactions. Finally, we have taken or will
take all
63
necessary steps to achieve compliance with other HIPAA rules as
applicable, including the standard unique employer identifier
rule, the standard healthcare provider identifier rule and the
enforcement rule.
HIPAA authorizes the imposition of civil money penalties against
entities that employ or enter into contracts with individuals or
entities that have been excluded from participation in the
Medicare or Medicaid programs. We perform background checks on
our affiliated physicians, and we do not believe that we engage
or contract with any excluded individuals or entities. However,
a finding that we have violated this provision of HIPAA could
have a material adverse effect on our business and financial
condition.
HIPAA also establishes several separate criminal penalties for
making false or fraudulent claims to insurance companies and
other non-governmental payors of healthcare services. These
provisions are intended to punish some of the same conduct in
the submission of claims to private payors as the FCA covers in
connection with governmental health programs. We believe that
our services have not historically been provided in a way that
would place either our clients or ourselves at risk of violating
the HIPAA anti-fraud statutes, including those in which we
received direct reimbursement because of the reassignment by
affiliated physicians to us or those in which we may be
considered to receive an indirect reimbursement because of the
reassignment by us to hospitals of the right to collect for
professional interpretations and technical services.
We continue to evaluate the effect of the HIPAA standards on our
business. At this time, we believe that our sleep centers have
taken all appropriate steps to achieve compliance with the HIPAA
requirements. Moreover, HIPAA compliance is an ongoing process
that requires continued attention and adaptation. We do not
currently believe that the cost of compliance with the existing
HIPAA requirements will be material to our operations; however,
we cannot predict the cost of future compliance with HIPAA
requirements. Noncompliance with HIPAA may result in criminal
penalties and civil sanctions. The HIPAA standards have
increased our regulatory and compliance burden and have
significantly affected the manner in which our sleep centers use
and disclose health information, both internally and with other
entities.
In addition to the HIPAA restrictions relating to the exchange
of healthcare information, individual states have adopted laws
protecting the confidentiality of patient information which
impact the manner in which patient records are maintained.
Violation of patient confidentiality rights under common law,
state or federal law could give rise to damages, penalties,
civil or criminal fines
and/or
injunctive relief. We believe that our sleep center operations
are in compliance with federal and state privacy protections.
However, an enforcement agency or court may find a violation of
state or federal privacy protections arising from our sleep
center operations.
Third-Party
Reimbursement
The cost of medical care in the United States and many other
countries is funded substantially by government and private
insurance programs. We receive payment for our products or
services directly from these third-party payors and our
continued success is dependent upon the ability of patients and
their healthcare providers to obtain adequate reimbursement for
those products and sleep disorder diagnostic services. In most
major markets, our services and supplies are utilized and
purchased primarily by patients suffering from obstructive sleep
apnea. Patients are generally covered by private insurance. In
those cases, the patient is responsible for his or her
co-payment portion of the fee and we invoice the patients
insurance company for the balance. Billings for the products or
services reimbursed by third-party payors, including Medicare
and Medicaid, are recorded as revenues net of allowances for
differences between amounts billed and the estimated receipts
from the third-party payors. In hospitals, we contract with the
hospital on a fee for service basis and the hospital
assumes the risk of billing.
The third-party payors include Medicare, Medicaid and private
health insurance providers. These payors may deny reimbursement
if they determine that a device has not received appropriate FDA
clearance, is not used in accordance with approved applications,
or is experimental, medically unnecessary or inappropriate.
Third-party payors are also increasingly challenging prices
charged for medical products and services, and certain private
insurers have initiated reimbursement systems designed to reduce
healthcare costs. The trend towards managed healthcare and the
growth of health maintenance organizations, which control and
significantly influence the purchase of healthcare services and
products, as well as ongoing legislative
64
proposals to reform healthcare, may all result in lower prices
for our products and services. There is no assurance that our
sleep disorder products and services will be considered
cost-effective by third-party payors, that reimbursement will be
available or continue to be available, or that payors
reimbursement policies will not adversely affect our ability to
sell our products and services on a profitable basis, if at all.
Minimum
Wage Requirements
We are impacted by recent legislation in states that increase
the minimum hourly wages to $7.25 on July 25, 2009. While
the increase in minimum hourly wages impacts our cost of labor,
most of our employees are skilled and are already above the
minimum hourly wage level. Additionally, we believe we can
offset a significant portion of any cost increase through
initiatives designed to further improve labor efficiency.
ApothecaryRx
Discontinued Operations
On September 1, 2010, we agreed to sell substantially all
of the assets of ApothecaryRxs independent retail pharmacy
business to Walgreens. The final closing was completed on
December 6, 2010. Through ApothecaryRx, we operated
independent retail pharmacy stores selling prescription drugs
and a small assortment of general merchandise, including
diabetic merchandise, non-prescription drugs, beauty products
and cosmetics, seasonal merchandise, greeting cards and
convenience foods. We had historically grown our pharmacy
business by acquiring financially successful independently-owned
retail pharmacies from long-term owners that were approaching
retirement. The acquired pharmacies successfully maintained
market share due to their convenient proximity to healthcare
providers and services, high customer service levels, longevity
in the community, competitive pricing. Additionally, our
independent pharmacies offered supportive services and products
such as pharmaceutical compounding, durable medical equipment,
and assisted and group living facilities. The pharmacies were
located in mid-size, economically-stable communities and we
believed that a significant amount of the value of the
pharmacies resides in retaining the historical pharmacy name and
key staff relationships in the community. As of
September 30, 2010, we owned and operated 18 retail
pharmacies located in Colorado, Illinois, Missouri, Minnesota,
and Oklahoma.
Employees
As of December 15, 2010, we had 210 full-time and 26
part-time employees at Graymark Healthcare, Inc. Our
employees are not represented by a labor union.
Properties
Our corporate headquarters and offices and the executive offices
of our SMS business are located in Oklahoma City, Oklahoma.
These office facilities consist of approximately
6,760 square feet and are occupied under a
month-to-month
lease with Oklahoma Tower Realty Investors, LLC, requiring
monthly rental payments of approximately $7,042.
Mr. Roy T. Oliver, one of our greater than 5%
shareholders and affiliates, controls Oklahoma Tower Realty
Investors, LLC. We believe that suitable additional or
substitute space will be available as needed on reasonable terms.
65
As of December 31, 2010, we operated 25 sleep clinics in
11 states. Each location is occupied under multiple-year
(or long-term) lease arrangements requiring monthly rental
payments. The following table presents as of September 30,
2010, the locations and lease expiration dates of occupancy
leases of each sleep center or clinic.
|
|
|
|
|
Lease
|
|
|
Expiration
|
Sleep Center and Clinic (City and State)
|
|
Date
|
|
Nevada:
|
|
|
Charleston
|
|
Month-to-month
|
Henderson
|
|
Dec. 2013
|
Oklahoma:
|
|
|
Tulsa Midtown
|
|
Jul. 2014
|
Tulsa South
|
|
Dec. 2010
|
Oklahoma City
|
|
Sep. 2014
|
Edmond
|
|
Month-to-month
|
Norman
|
|
Jan. 2014
|
Texas:
|
|
|
Southlake Keller
|
|
Jul. 2013
|
McKinney
|
|
Sep. 2011
|
Plano
|
|
May 2012
|
Granbury
|
|
Apr. 2011
|
Bedford
|
|
Dec. 2013
|
Waco
|
|
Jan. 2018
|
Willow Bend
|
|
May. 2013
|
Kansas
|
|
|
Overland Park
|
|
Sep. 2011
|
Overland Park
|
|
Oct. 2027
|
Missouri
|
|
|
Lees Summit
|
|
Sept. 2015
|
Kansas City
|
|
Dec. 2014
|
Iowa
|
|
|
Waukee
|
|
Jul. 2011
|
Waukee
|
|
Mar. 2012
|
Pleasant Hill
|
|
Nov. 2012
|
South Dakota
|
|
|
Sioux Falls
|
|
Jan. 2011
|
Nebraska
|
|
|
Omaha
|
|
Nov. 2013
|
New York
|
|
|
Williamsville
|
|
May 2014
|
Buffalo
|
|
Month-to-month
|
Dunkirk
|
|
Mar. 2012
|
Lockport
|
|
May 2011
|
West Seneca
|
|
Jan. 2012
|
Buffalo
|
|
Jul. 2011
|
Florida
|
|
|
Coral Springs
|
|
Oct. 2013
|
66
Our former ApothecaryRx executive offices are located in Golden
Valley, Minnesota, under a lease arrangement that expires in
November 2013.
Legal
Proceedings
From time to time, we are subject to claims and suits arising in
the ordinary course of our business, including claims for
damages for personal injuries. In our managements opinion,
the ultimate resolution of any of these pending claims and legal
proceedings will not have a material adverse effect on our
financial position or results of operations.
67
MANAGEMENT
Directors
and Executive Officers
The following table sets forth information regarding our
directors and executive officers as of the date of this
prospectus:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with the Company
|
|
Stanton Nelson
|
|
|
39
|
|
|
Chief Executive Officer and Chairman of the Board
of Directors
|
Edward M. Carriero, Jr.
|
|
|
55
|
|
|
Chief Financial Officer
|
Grant Christianson
|
|
|
41
|
|
|
Chief Accounting Officer
|
Lewis P. Zeidner
|
|
|
55
|
|
|
Chief Operating Officer
|
Scott Mueller(1)(2)(3)
|
|
|
39
|
|
|
Director
|
Joseph Harroz, Jr.
|
|
|
43
|
|
|
President and Director
|
S. Edward Dakil, M.D.(1)(2)(3)
|
|
|
54
|
|
|
Director
|
Steven L. List(1)(2)(3)
|
|
|
43
|
|
|
Director
|
|
|
|
(1) |
|
Serves on our Compensation Committee. |
|
(2) |
|
Serves on our Audit Committee. |
|
(3) |
|
Serves on our Nominating and Governance Committee. |
The following is a brief description of the business background
of our executive officers and directors:
Stanton Nelson was named as our Chief Executive Officer
during January 2008 and has served as one of our directors since
August 2003. In addition to his position with Graymark,
Mr. Nelson serves as Executive Vice President of R.T.
Oliver Investment Company, a privately-held company engaged in
oil and gas exploration, retail and commercial real estate and
banking. R.T. Oliver Investments is controlled by
Roy T. Oliver, one of our greater than 5% shareholders.
Mr. Nelson also serves on the board of directors of
Valliance Bank as its Vice Chairman. Previously, Mr. Nelson
was the Chief Executive Officer of Monroe-Stephens Broadcasting,
a privately-held company that owned and operated radio stations
in Southwest Oklahoma and Dallas, Texas. Mr. Nelson began
his career as a staff member for United State Senator David
Boren. Mr. Nelson has a Bachelor of Business Administration
in business management from the University of Oklahoma.
Edward M. Carriero, Jr. was named our Chief
Financial Officer in November 2010. Mr. Carriero served as
our Senior Vice President of Operations from October 2010 to
November 2010. Mr. Carriero also serves as an Operating
Advisor to Royal Palm Capital Management; a position he has held
since February 2006. Mr. Carriero served as Interim Chief
Financial Officer of Sunair Services Corporation from September
2006 to February 2008 and Chief Financial Officer from February
2008 until December 2009. Mr. Carriero also served as the
Chief Financial Officer of Middleton Pest Control, Inc. from
February 2006 through February 2007. Prior to joining Middleton,
from July 2003 to February 2006, Mr. Carriero served as the
revenue auditor for Broward County Port Everglades, a large
seaport in South Florida. From October 2001 to July 2003,
Mr. Carriero served as Chief Financial Officer of Apex
Maintenance Services, Inc., a roofing contractor. From June 1998
to October 2001, Mr. Carriero provided consulting services
to various businesses. From June 1991 to June 1998,
Mr. Carriero held several operating positions for Huizenga
Holdings, Inc., including: Executive Vice President/Chief
Financial Officer and Director for Life General Security
Insurance Company, a $100 million life and health insurance
company operating in 27 states; Executive Vice
President/Chief Operating Officer for Blue Ribbon Water Company,
a bottled water delivery company; and Vice President and General
Manager of Suncoast Helicopters, Inc., a helicopter charter
company. Mr. Carriero received his Bachelor of Science in
accounting from Saint Francis College in Brooklyn, N.Y. and
his MBA from the University of Miami.
68
Grant Christianson was named our Chief Accounting Officer
in November and previously served as our Chief Financial Officer
from April 2009 until November 2010. Mr. Christianson has
served as Vice President for Finance and Accounting of
ApothecaryRx, LLC since August 2006. Prior to becoming Vice
President for Finance and Accounting of ApothecaryRx,
Mr. Christianson was a principal in a financial operations
consulting firm that he founded in 2005. Previously he held
financial management positions within Novartis Medical Nutrition
and McKesson Medication Management. Mr. Christianson is a
member of the American Institute of Certified Public
Accountants, and he received a Bachelor of Accountancy from the
University of North Dakota.
Lewis P. Zeidner has served as our Chief Operating
Officer since September 30, 2009, the President and Chief
Executive Officer of SDC Holdings, LLC since September 30,
2009, and served as the President and Chief Executive Officer of
ApothecaryRx, LLC since 2006. In 2003, he co-founded
PrairieStone Pharmacy, LLC, a retail pharmacy chain that built
and operated small footprint, highly automated pharmacies in
grocery stores. In 1996, Mr. Zeidner co-founded
MedManagement, LLC a company that outsourced hospital and health
system pharmacies. He was President of MedManagement from 1999
until 2003. Prior to 1999, Mr. Zeidner held various
executive positions within healthcare companies including Baxter
Healthcare and the Greenville Hospital System. Mr. Zeidner
has a Bachelor of Arts from Franklin and Marshall College and a
Master of Science from the University of Connecticut.
Scott Mueller has served as one of our directors since
July 2008. Mr. Mueller is currently a partner at the
private equity firm of Hall Capital Partners. Prior to joining
Hall Capital Partners, he was a partner at TLW Investments from
June 2008 to July 2009. He was employed at Goldman Sachs from
1999 through May 2008, most recently as a vice president in the
Private Wealth Management group from 2002 through 2008.
Mr. Mueller earned a Masters of Business Administration
from the University of Texas in 1999 and graduated from the
Honors College at Michigan State University in 1992 with a
Bachelor of Arts in General Administration Pre Law.
Mr. Mueller also serves on the board of ProspX, Inc.
Joseph Harroz, Jr. has served as one of our
directors since December 2007. Mr. Harroz is currently the
Dean of the University of Oklahoma College of Law, a position he
held since July 2010. Previously, Mr. Harroz served as our
President from July 2008 until June 2010 and Chief Operating
Officer from July 2008 until September 2009. Mr. Harroz
served as Vice President and General Counsel of the Board of
Regents, University of Oklahoma since 1996 and has been an
Adjunct Professor, University of Oklahoma Law School since 1997
and has served as the Managing Member of Harroz Investments, LLC
(commercial enterprise) since 1998. He is also a member and
Chairman of the Board of Trustees of Waddell and Reed Ivy Funds
and a Trustee of Waddell and Reed Advisors Funds, both
open-ended mutual fund complexes managed by Waddell and Reed; a
Consultant for MTV Associates (2004 to 2005); and serves as a
Director of Valliance Bank (beginning in 2004), Mewbourne Family
Support Organization (2000 to 2008), Norman Economic Development
Coalition (2004 to 2008) and Oklahoma Foundation for
Excellence (beginning in 2008).
S. Edward Dakil, M.D. has served as one of our
directors since January 2008. Dr. Dakil is a practicing
physician and in 1987 began his employment with Norman Urology
Associates, P.C. Commencing in 1990 he began serving as a
clinical instructor for the Department of Urology of the
University of Oklahoma Health Science Center and in 1998 became
a member of the Board of Directors of the Oklahoma Lithotripsy
Center. Dr. Dakil was graduated from the University of
Oklahoma, first with a Bachelor of Science (Chemistry) in 1987
and a Doctorate of Medicine in 1982 and is a member of various
medical associations, including American Urologic Association
and American Association of Clinical Urologists.
Steven List has served as one of our directors since
December 2009. Mr. List is currently an independent
consultant who provides financial advisory and transaction
services to companies. Previously, Mr. List was Senior Vice
President and Chief Financial Officer of Mattress Giant
Corporation from February 2002 to June 2008 and served as a
Managing Director of Crossroads, LLC from December 1998 to
January 2002. From May 1995 to November 1998, he served as
Senior Manager, Corporate Restructuring at KPMG, LLP.
Mr. List earned his BBA in accounting from the University
of Oklahoma and is a certified public accountant and certified
insolvency and restructuring advisor.
69
Composition
of our Board of Directors
Our Bylaws provide that our Board of Directors shall consist of
not less than one and a greater number as determined from time
to time by resolution of our Board of Directors. The number of
directors is currently fixed at five. In general, a director
holds office for a term expiring at the next annual meeting of
our shareholders or until her or his successor is duly elected
and qualified. Nominations of candidates for election as our
directors may be made at any meeting of our shareholders by or
at the direction of our Board of Directors or by any shareholder
entitled to vote at the meeting. Our Bylaws provide that our
Board will fix the date of the annual meeting of our
shareholders.
Director
Independence
Our Board of Directors currently consists of five members, three
of whom qualify as independent within the meaning of the listing
standards of The NASDAQ Stock Market, Inc. The Board determined
that each member of the Board of Directors, other than Stanton
Nelson and Joseph Harroz, Jr., qualify as independent
directors. Messrs. Nelson and Harroz do not qualify because
each also serves as one of our executive officers.
Board
Committees
Our Board of Directors maintains three standing committees:
Audit, Compensation and Nominating and Corporate Governance. The
Compensation Committee and Audit Committee were established in
January 2008 and the Nominating and Corporate Governance
Committee was established in April 2008.
The Audit Committee is responsible for the selection and
retention of our independent auditors, reviews the scope of the
audit function of the independent auditors, and reviews audit
reports rendered by the independent auditors. All of the members
of the Audit Committee are independent directors as
defined in Rule 5605(a)(2) of the NASDAQ Stock Market, Inc.
marketplace rules (the NASDAQ rules), and Scott
Mueller serves as the Audit Committee financial expert.
The Compensation Committee reviews our compensation philosophy
and programs, and exercises authority with respect to payment of
direct salaries and incentive compensation to our officers. A
discussion of the Compensation Committee interlocks and insider
participation is provided below under the section heading
Compensation Committee Interlocks and Insider
Participation.
The Nominating and Corporate Governance Committee
(a) monitors and oversees matters of corporate governance,
including the evaluation of Board performance and processes and
the independence of directors, and (b) selects,
evaluates and recommends to the Board of Directors qualified
candidates for election or appointment to the Board of Directors.
All committees report on their activities to our Board and serve
at the pleasure of our Board. The specific duties and authority
of each committee is set forth in its charters. The charters of
our Audit, Compensation, and Nominating and Corporate Governance
Committees are available on our website at
www.graymarkhealthcare.com under the section marked
investor relations. Information on or accessible
through our website is not part of this prospectus.
Compensation
Committee Interlocks and Insider Participation
The members of our Compensation Committee have not served as one
of our officers or been in our employ. No member of our
Compensation Committee has any interlocking relationship with
any other company. None of our executive officers have served as
a director or member of the compensation committee of any entity
that has one or more executive officers serving as a member of
our Board of Directors or Compensation Committee.
Code of
Business Conduct and Ethics
In August 2009, we adopted a revised code of business conduct
and ethics that applies to all of our employees, officers and
directors, and includes additional standards of conduct for our
principal executive,
70
financial and accounting officers and all persons responsible
for financial reporting. See Certain Relationships and
Related Party Transactions. Our code of business conduct
and ethics is available on our website at
www.graymarkhealthcare.com. Information on, or accessible
through, our website is not part of this prospectus. We expect
that any amendments to the code, or any waivers of its
requirements, will be disclosed on our website.
Director
Compensation for the Year Ended December 31, 2009
We do not compensate directors for serving on our Board of
Directors or attending meetings of our Board of Directors or any
of its committees. However, it is anticipated that restricted
stock grants and stock options will be granted to our directors
on terms to be determined by our Board of Directors. We
reimburse our directors for travel and
out-of-pocket
expenses in connection with their attendance at meetings of our
Board of Directors. During 2009, each of our non-employee
directors received 15,000 shares of restricted stock. See
Executive Compensation Summary Compensation
Table-2009 for compensation received by directors in their
capacities as our employees.
71
EXECUTIVE
COMPENSATION
The following table sets forth the total compensation of our
Chief Executive Officer, our Chief Financial Officer and our
other named executive officers for our fiscal years ended
December 31, 2008 and 2009.
Summary
Compensation Table 2009
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Named and
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Stock
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Option
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All Other
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Principal Position
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Year
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Salary
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Bonus
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Awards(1)
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Awards(2)
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Compensation(3)
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Total
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Stanton Nelson
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2009
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$
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$
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$
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244,000
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$
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$
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$
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244,000
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Chief Executive Officer
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2008
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$
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$
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169,362
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$
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$
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26,337
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$
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130,726
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$
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326,425
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Grant A. Christianson(4)
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2009
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$
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145,000
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$
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$
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329,400
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$
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$
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$
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474,400
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Chief Financial Officer
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2008
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$
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130,000
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$
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19,372
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$
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$
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$
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$
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149,372
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Joseph Harroz, Jr.
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2009
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$
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250,000
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$
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$
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510,000
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$
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$
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$
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760,000
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President
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2008
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$
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114,583
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$
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84,681
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$
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160,000
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$
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26,337
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$
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58,637
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$
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444,238
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Lewis P. Zeidner
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2009
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$
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207,692
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$
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$
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$
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89,123
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$
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$
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296,815
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Chief Operating Officer
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2008
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$
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190,000
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$
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$
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$
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$
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$
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190,000
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(1) |
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The value of Stock Awards is the grant date fair value
multiplied by the number of shares awarded. For financial
reporting purposes, the fair value of the Stock Awards is
expensed over the requisite vesting period for the award. The
assumptions the Company used for calculating the grant date fair
values are set forth in note 12 to the Companys
consolidated financial statements included in the Companys
annual report on
Form 10-K
for the year ended December 31, 2009. |
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(2) |
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The value of Option Awards is the grant date fair value. For
financial reporting purposes, the fair value of the Option
Awards is expensed over the requisite vesting period for the
award. The assumptions the Company used for calculating the
grant date fair values are set forth in note 12 to the
Companys consolidated financial statements included in the
Companys annual report on
Form 10-K
for the year ended December 31, 2009. |
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(3) |
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On December 30, 2008, a majority of the independent
directors of our Compensation Committee approved compensation
bonuses to Messrs. Nelson, Simpson and Harroz. These
bonuses were
grossed-up
for the payment of taxes. The amount of the bonuses that
represent the
gross-up
is included as other compensation. |
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(4) |
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Mr. Christianson was appointed as our Chief Financial
Officer on April 30, 2009. |
Aggregate
Option and Restrictive Stock Grants and Exercises in 2009 and
Year-End Values
On October 13, 2009, we granted stock options to our Chief
Operating Officer, Lewis Zeidner in the amount of
100,000 shares. One-third of Mr. Zeidners option
grant vests on the grant date and on each of the first two
anniversaries thereof. The options had a grant date fair value
of $89,123.
On October 12, 2009, we granted restrictive stock grant
awards to our Chief Executive Officer, Stanton Nelson, and our
Chief Financial Officer, Grant Christianson, in the amount of
100,000 shares and 135,000 shares respectively. The
stock grant awards were valued at $2.44 per share which was
the closing sale price of our common stock on Nasdaq on the
grant date of the stock awards. Mr. Nelsons award
vested immediately. Mr. Christiansons award vests
over four years with 15,000 shares vesting immediately,
30,000 shares vesting August 1, 2010,
45,000 shares vesting August 1, 2011,
30,000 shares vesting August 1, 2012 and
15,000 shares vesting August 1, 2013.
On January 8, 2009, we granted restrictive stock grant
awards to our President and former Chief Operating Officer,
Joseph Harroz, Jr. in the amount of 300,000 shares.
The stock grant award was valued at $1.70 per share, which
was the closing sale price of our common stock on Nasdaq on the
grant date of the stock grant award. The stock grant award vests
over a four year period with 17% of the shares vesting
July 23, 2009, 33% of the shares vesting July 23, 2010
and July 23, 2011 and 17% of the shares vesting
July 23, 2012.
72
Outstanding Equity Awards. The following table
sets forth information related to the number of stock options
and stock grants that have not vested held by our named
executive officers at December 31, 2009. During 2009, no
options to purchase our common stock were exercised by the named
executive officers.
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Outstanding Equity Awards at December 31, 2009
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Option Awards
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Number of
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Shares of Stock That
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Common Stock
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Option
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Option
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Have Not Vested
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Underlying Options
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Exercise
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Expiration
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Market
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Name
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Exercisable
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Unexercisable
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Price(1)
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Date
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Number
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Value
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Stanton Nelson
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15,000
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$
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3.75
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4/23/2013
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4,000
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$
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3.75
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9/30/2011
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Grant A. Christianson
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120,000
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(2)
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$
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210,000
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Joseph Harroz, Jr.
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15,000
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$
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3.75
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4/23/2013
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250,000
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(3)
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$
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437,500
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50,000
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(4)
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$
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87,500
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Lewis P. Zeidner
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33,333
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66,667
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(5)
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$
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2.30
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9/30/2014
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(1) |
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The closing sale price of our common stock as reported on The
NASDAQ Capital Market on December 31, 2009 was $1.75. |
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(2) |
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15,000 shares vested on October 12, 2009. 30,000,
45,000, 30,000 and 15,000 are scheduled to vest on
August 1, 2010, 2011, 2012 and 2013, respectively. |
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(3) |
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50,000 shares vested on July 23, 2009. 100,000,
100,000 and 50,000 shares are scheduled to vest on
July 23, 2010, 2011 and 2012, respectively. On
March 25, 2010, in connection with Mr. Harroz
resignation, the Board accelerated vesting on 75,000 shares
which were scheduled to vest on July 23, 2010 with the
remaining 175,000 shares being immediately forfeited. |
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(4) |
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50,000 shares vested on July 23, 2009 and
50,000 shares were scheduled to vest on July 23, 2010.
On March 25, 2010, in connection with Mr. Harroz
resignation, the Board accelerated vesting on 37,500 shares
which were scheduled to vest on July 23, 2010 with the
remaining 12,500 of the shares being immediately forfeited. |
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(5) |
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33,333 shares vested on October 13, 2009 and 33,333
and 33,334 shares are scheduled to vest on October 1,
2010 and 2011, respectively. |
Employment
Arrangements
We have a three-year employment agreement with each of Grant
Christianson, Joseph Harroz, Jr., Stanton Nelson and
Lewis P. Zeidner (each an executive officer).
Each of the agreements is automatically extended for additional
three year periods, unless earlier terminated in accordance with
its terms or we notify the executive officer within
120 days of termination date that the term will not be
extended. On March 25, 2010, Mr. Harroz announced his
resignation from Graymark effective June 30, 2010. The
Board of Directors amended his agreement to provide for his
service through June 30, 2010. The material terms of the
employment agreements are summarized below:
Executive Officer Position. In accordance with
the terms of the employment agreements, the employment of each
of Messrs. Christianson, Harroz, Nelson and Zeidner is full
time requiring best efforts and due diligence, and may be
terminated with or without cause. Mr. Christianson is to
serve as our Chief Financial Officer. On November 15, 2010,
we amended Mr. Christiansons agreement to provide
that he is to serve as our Chief Accounting Officer.
Mr. Harroz is to serve as our (and SDC Holdings,
LLCs) President and Chief Operating Officer, provided that
effective September 30, 2009, Mr. Harroz only serves
as our President. Effective April 1, 2010, Mr. Harroz
is working on a half-time basis. Mr. Nelson is to serve as
either or both of our Chief Executive Officer and Chairman of
the Board of Directors. Mr. Zeidner is to serve as Chief
Executive Officer of ApothecaryRx, LLC, and effective
September 30, 2009, Mr. Zeidner was appointed as our
Chief Operating Officer and the President and Chief Executive
Officer of SDC Holdings, LLC. Except to a limited extent and as
expressly permitted by ApothecaryRx, SDC Holdings or our Board
of Directors, each of Messrs. Nelson and Zeidner is
prohibited from serving as an officer or director of a
publicly-held company,
73
own an interest in a company that interferes with his full-time
employment or that is engaged in a business activity similar to
ours, ApothecaryRx, LLC or SDC Holdings, LLC as may be
applicable.
Compensation. Each of
Messrs. Christianson, Nelson and Zeidner is to receive an
annual base salary $160,000, $1 and $235,000, respectively, as
well as any bonus compensation as determined in our discretion.
Mr. Harroz is entitled to an annual base salary of $250,000
through March 31, 2010 and $125,000 thereafter. Each is
entitled:
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to participate in the employee benefit plans and programs
maintained and provided to our executive officers and employees;
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to reimbursement of reasonable and ordinary expenses incurred on
our behalf based upon substantiated documentation of the
expenditure; and
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to four weeks of fully paid calendar-year vacation.
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Further, Mr. Nelson is entitled to receive
100,000 shares of fully vested common stock annually
pursuant to our 2008 Long-Term Incentive Plan. Mr. Harroz
is entitled to receive 150,000 shares of restricted stock
annually in 2009 and 2010. Mr. Zeidner is entitled to
receive five-year stock option awards on October 1, 2010
and 2011 exercisable for the purchase of 75,000 common stock
shares, subject to his continuous employment with us or any of
our subsidiaries. Also, in the event ApothecaryRx achieves 90%
of the budgeted net income during the
12-month
period ending September 2010 and 2011, Mr. Zeidner will be
entitled to a stock option award exercisable for the purchase of
25,000 common stock shares. Each stock option award was or will
be made pursuant to our 2008 Long-Term Incentive Plan. In the
event ApothecaryRx is sold or otherwise divested by us at any
time prior to September 2011, the stock options that may then be
awarded to Mr. Zeidner based upon achievement of the
12-month
budgeted net income during the following
12-month
period or periods will be awarded to Mr. Zeidner. Under the
terms of each Stock Option Award Agreement, the stock options
vest or become exercisable in three installments, the first on
the date of Stock Option Award Agreement and on the following
second and third anniversary dates. Furthermore, in the event of
a change of control as defined in our 2008 Long-Term
Incentive Plan, 50% of the then unvested stock options will vest
and become exercisable by Mr. Zeidner.
Employer Termination. Each agreement is for a
three year term, subject to termination with or without cause.
We have the right to terminate the employment agreement without
cause (for any reason) on at least
30-day
advance notice (Without Cause Termination). In the
event of Without Cause Termination the executive officer will be
entitled to one year of his base salary and the continuance of
all employee benefits for one year in the case of
Mr. Zeidner and Mr. Christianson, 200% of his base
salary and insurance benefits for 18 months post
termination in the case of Mr. Harroz, and grant of
300,000 shares of fully vested common stock under our 2008
Long-Term Incentive Plan reduced by any amounts of common stock
already granted to him pursuant to his employment agreement
provided that he must give us notice of one of these conditions
within 90 days of its existence and allow us 30 days
to remedy the condition before his employment agreement can be
terminated and continuation of all employment benefits for one
year in the case of Mr. Nelson, unless he asserts any
provision of his employment agreement is invalid or
unenforceable.
We may terminate the executive officers employment
agreement in the case of Messrs. Nelson and Zeidner in the
event of the following (For Cause Termination with
respect to these officers):
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He engages in gross personal misconduct which materially injures
us, or any fraud or deceit regarding our business or customers
or suppliers;
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He enters a plea of nolo contendere to or is convicted of a
felony;
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He willfully and repeatedly fails to perform his duties after
receiving notice and being provided an opportunity to correct
such actions; or
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He breaches any material term or provision of his employment
agreement (For Cause Termination for
Mr. Christianson).
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74
Or in the case of Messrs. Christianson and Harroz, we may
termination his employment agreement in the event of any of the
following:
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An act or acts of dishonesty taken and intended to result in a
substantial personal enrichment at our expense;
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He enters a plea of nolo contendere to or is convicted of a
felony that relates to his employment; or
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The willful failure to follow a direct lawful written order from
the chairman of our Board of Directors, within the reasonable
scope of his duties and such failure is not cured in
10 days,
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Prior to any For Cause Termination, with respect to
Messrs. Nelson and Zeidner, a written determination
specifying the reasons for termination must be delivered and
received and the executive officer will thereafter have
30 days to request a meeting to be heard and contest the
reasons for termination.
Executive Officer Termination. Each of
Messrs. Nelson and Zeidner has the right to terminate his
employment agreement, either with or without cause. A without
cause termination requires the providing of
30-days
advance notice to us. In the event of a without cause
termination, all future obligations under the employment
agreement will terminate.
The executive officer, with respect to Messrs. Nelson and
Zeidner, has the right to terminate his employment agreement for
cause in the event that we fail to pay the base compensation or
provide employee benefits in accordance with his employment
agreement and fail to cure such breach within 30 days after
receiving notice from the executive officer (Employer
Breach). In the event of termination as a result of
Employer Breach, the executive officer will be entitled to
receive as termination compensation equal to one year of his
base compensation payable with respect to Mr. Zeidner, and
within 30 days following his termination date an award of
300,000 shares of fully vested shares of common under our
2008 Long-Term Incentive Plan reduced by any amounts of common
stock already granted to him pursuant to his employment
agreement provided that he must give us notice of one of these
conditions within 90 days of its existence and allow us
30 days to remedy the condition before his employment
agreement can be terminated, with respect to Mr. Nelson,
within 30 days following the termination date and
continuance of all employee benefits for one year.
Messrs. Christianson and Harroz has the right to terminate
his employment for good reason defined as:
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a material diminution in his authority, duties or
responsibilities;
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our reduction of his base salary or a reduction in the equity
incentives described above;
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the requirement that he be based at any office or location that
is more than 60 miles from such officers principal
office location, except for travel reasonably required in the
performance of his responsibilities; or
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any other action or inaction that constitutes our material
breach of the Employment Agreement, including the failure of our
successor to assume the Employment Agreement;
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In the event termination for good reason we agreed
to pay Messrs. Christianson and Harroz 200% of his base
salary and insurance benefits for 18 months.
Disability; Death. With respect to
Messrs. Nelson and Zeidner, in the event a physical or
mental condition prevents the executive officer from fulfilling
his duties and responsibilities for a period of three
consecutive months, the employment of the executive officer may
be terminated for cause. In this case, all compensation and
benefits payable under his employment agreement will continue
for six months, reduced by any disability plan benefits to which
he is entitled, in addition, Mr. Nelson is entitled to
receive 50,000 shares of restricted stock under our 2008
Long-Term Incentive Plan.
With respect to Messrs. Nelson and Zeidner, upon the death
of the executive officer, his employment agreement will
terminate; however, the estate of such executive officer will be
entitled to receive six months of the base salary of the
deceased executive officer in case of Mr. Zeidner, or
50,000 shares of restricted stock in the case of
Mr. Nelson, and employee benefits provided under the
employment agreement.
75
Confidentiality. The executive officer will be
required to maintain the confidentiality of the information that
constitutes trade secrets or is of a business or confidential
nature, regardless of the source of the confidential information
or how it was obtained. With respect to Messrs. Nelson and
Zeidner, this confidentiality is to be maintained during
employment and the two years following termination of the
employment agreement.
Non-competition and Non-solicitation
Covenants. With respect to Messrs. Nelson
and Zeidner, during the 24 months following employment
termination, the executive officer agreed as follows:
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Not to acquire, attempt to acquire, solicit, perform services
(directly or indirectly) in any capacity for, or aid another in
the acquisition or attempted acquisition of an interest in any
business similar to that of ApothecaryRx or SDC Holdings in any
city of a state in the United States where Graymark,
ApothecaryRx, or SDC Holdings owns any interest in a sleep
center or that is within 40 miles of a pharmacy owned by
ApothecaryRx or sleep center location owned by SDC
Holdings; or
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Not to solicit, induce, entice or attempt to entice (directly or
indirectly) any employee, officer or director (except the
executive officers personal secretary, if any),
contractor, customer, vendor or subcontractor of ApothecaryRx or
SDC Holdings or ours to terminate or breach any relationship
with ApothecaryRx or SDC Holdings or us or any of our
affiliates, or
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Not to solicit, induce, entice or attempt to entice any
customer, vendor or subcontractor of ApothecaryRx or SDC
Holdings or ours to cease doing business with SDC Holdings,
ApothecaryRx or us or any of our affiliates.
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With respect to Messrs. Christianson and Harroz, during one
year following his employment termination,
Messrs. Christianson and Harroz agreed either personally or
by or through his agent or by letters, circulars or
advertisements and whether for himself or on behalf of any other
person, not to seek to persuade any one of our employees nor any
person who was one of our employees during the one-year period,
to discontinue his or her employment with us, or to become
employed in any business activities likely to be competitive
with ours.
Arbitration. Any dispute or controversy
arising out or relating to the executive officers
employment or employment termination that cannot be resolved by
agreement will be submitted to binding arbitration in accordance
with the Rules for Commercial Cases of the American Arbitration
Association and in accordance with the Federal Arbitration Act.
The arbitrators judgment will be final and binding,
subject solely to challenge on the grounds of fraud or gross
misconduct. The arbitrator will be limited to awarding
compensatory damages. The arbitration proceedings will be the
sole and exclusive remedies and procedures for the resolution of
disputes and controversies; however, a preliminary injunction or
other provisional judicial relief may be sought if deemed
reasonably necessary to avoid irreparable damage or to preserve
the status quo pending arbitration.
On October 5, 2010, Graymark entered into an Employment
Agreement with Edward M. Carriero, Jr. with an initial term
of three years which is automatically extended on each
anniversary date such that the remaining term is three years.
Mr. Carrieros arrangement with Graymark provides for
employment at will with an initial base salary of
$200,000 per year. Mr. Carriero was also granted a stock
option on his first day of employment (the Grant
Date) exercisable for 50,000 shares of
Graymarks common stock at the closing price on the Grant
Date. The option is fully vested upon the Grant Date.
Mr. Carriero is eligible for participation in any and all
benefit programs that Graymark makes available to its employees,
including health, dental and life insurance to the extent that
he meets applicable eligibility requirements. Mr. Carriero
is entitled to four weeks paid vacation yearly. Upon termination
of Mr. Carrieros employment by Graymark without cause
or by Mr. Carriero with Good Reason, Mr. Carriero
shall be entitled to a payment equal to his most recent annual
base salary plus eligibility in health and certain other benefit
plans for 18 months from termination.
Compensation
of Directors
We do not compensate directors for serving on our Board of
Directors or attending meetings of our Board of Directors or any
of its committees. However, it is anticipated that restricted
stock grants and stock options
76
will be granted to our directors on terms to be determined by
our Board of Directors. We reimburse our directors for travel
and
out-of-pocket
expenses in connection with their attendance at meetings of our
Board of Directors. During 2009, each of our non-employee
directors received 15,000 shares of restricted stock. All
compensation received by our directors who are also executive
officers is included in our Summary Compensation Table. See
Executive Compensation Summary Compensation
Table for compensation received by directors who are also
our employees.
Director
Compensation Table 2009
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All Other
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Stock awards ($)
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Option Awards ($)
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Compensation ($)
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Total ($)
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|
S. Edward Dakil, M.D.
|
|
$
|
24,000
|
|
|
|
|
|
|
|
|
|
|
$
|
24,000
|
|
Steven L. List
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott R. Mueller
|
|
$
|
24,000
|
|
|
|
|
|
|
|
|
|
|
$
|
24,000
|
|
William R. Oliver
|
|
$
|
24,000
|
|
|
|
|
|
|
|
|
|
|
$
|
24,000
|
|
|
|
|
(1) |
|
As of December 31, 2009, Messrs. Nelson, Harroz, Dakil
and Mueller have outstanding stock options exercisable for
15,000 shares at a price of $3.75. The stock options for
Messrs. Nelson and Harroz are exercisable through
April 23, 2013. The stock options for Dr. Dakil are
exercisable through July 23, 2010. |
|
|
|
(2) |
|
As of December 31, 2009, Mr. List has no outstanding
stock awards. |
Equity
Compensation Plans
For the benefit of our employees, directors and consultants, we
have adopted three stock option plans, the 2008 Long-Term
Incentive Plan, the 2003 Stock Option Plan (the Employee
Plan) and the 2003 Non-Employee Stock Option Plan (the
Non-Employee Plan).
The 2008 Long-Term Incentive Plan. For
the benefit of our employees, directors and consultants, we
adopted the 2008 Long-Term Incentive Plan (the Incentive
Plan). The Incentive Plan was established to create equity
compensation incentives designed to motivate our directors and
employees to put forth maximum effort toward our success and
growth and enable our ability to attract and retain experienced
individuals who by their position, ability and diligence are
able to make important contributions to our success. The
Incentive Plan provides for the grant of stock options,
including incentive stock options (within the meaning of
Section 422 of the Internal Revenue Code of 1986, as
amended (the Code)), restricted stock awards,
performance units, performance bonuses and stock appreciation
rights to our employees and the grant of nonqualified stock
options, stock appreciation rights and restricted stock awards
to non-employee directors, subject to the conditions of the
Incentive Plan (Incentive Awards). The number of
shares of common stock authorized and reserved for issuance
under the Incentive Plan is 3,000,000.
For purposes of administration of the Incentive Plan, it is
deemed to consist of three separate incentive plans, a
Non-Executive Officer Participant Plan, an Executive Officer
Participant Plan and a Non-Employee Director Participant Plan.
Except for administration and the category of employees eligible
to receive incentive awards, the terms of the Non-Executive
Officer Participant Plan and the Executive Officer Participant
Plan are identical. The Non-Employee Director Plan has other
variations in terms and only permits the grant of nonqualified
stock options and restricted stock awards. The Incentive Plan is
designed to provide flexibility to meet our needs in a changing
and competitive environment while minimizing dilution to our
shareholders. We do not intend to use all incentive elements of
the Incentive Plan at all times for each participant but will
selectively grant the incentive awards and rights to achieve
long-term goals.
The Incentive Plan became effective on October 29, 2008 and
was approved and adopted by our Board of Directors on
October 30, 2008 and by our shareholders on
December 30, 2008. The Incentive Plan has a
10-year
term, ending October 29, 2018, during which time incentive
awards may be granted. The Incentive Plan will continue in
effect until all matters relating to the payment of incentive
awards and administration are settled.
77
The 2003 Employee Plan. The 2003
Employee Plan terminated on December 31, 2009. Prior to
this time, the plan provided for the issuance of non-qualified
stock options, non-qualified stock options with stock
appreciation rights attached, incentive stock options and
incentive stock options with stock appreciation rights attached.
The number of shares of common stock authorized and reserved for
issuance under the plan is 60,000. We granted stock options
exercisable for the purchase of 16,000 common stock shares at
$3.75 per share, on or before September 30, 2011.
Our Board of Directors administers and interprets this plan
(unless delegated to a committee) and has authority to grant
incentive awards to all eligible participants and determine the
types of incentive awards granted, and the terms, restrictions
and conditions of the incentive awards at the time of grant.
The exercise price of options is determined by our Board of
Directors, but can not be less than the fair market value of our
common stock on the date of grant, where fair market value is
equal to the last sale price, or if no sale has occurred, the
mean between the closing high bid and low asked quotations on
the principal securities exchange on which our shares are
listed, on the date of grant. Upon the exercise of an option,
the exercise price must be paid in full, in cash, in our common
stock (at the fair market value thereof) or a combination
thereof.
No options granted under the 2003 Employee Plan are exercisable
within six months of the date of grant, nor more than
10 years after the date of grant, provided that the Board
of Directors has the discretion to fix the period during which
options are exercisable. Options qualifying as incentive stock
options are exercisable only by an optionee during the period
when actively employed by the Company or a subsidiary. However,
in the event of death or disability of the optionee, the
incentive stock options are exercisable for one year following
death or disability, in the case of retirement of the employee,
are exercisable for three months following such retirement. In
any event options may not be exercised beyond the expiration
date of the options. Options are not transferable except by will
or by the laws of descent and distribution.
All outstanding options granted under the plan will become fully
vested and exercisable, but limited to that number of shares of
stock that can be acquired without causing the optionee to have
an excess parachute payment as determined under
Section 280G of the Code, immediately prior to our
dissolution or liquidation, or any merger, consolidation or
combination in which we are not the surviving corporation,
provided that such change is not meant to merely change the
identity, form or place of the Company.
The 2003 Non-Employee Stock Option
Plan. The Non-Employee Plan terminated on
December 31, 2009. Prior to termination, this plan provided
for the grant of stock options to our non-employee directors,
consultants and other advisors. Our employees were not eligible
to participate in the Non-Employee Plan. Under the provisions of
this plan, options do not qualify as incentive stock options for
federal income tax purposes and accordingly will not qualify for
the favorable tax consequences thereunder upon the grant and
exercise of the options. The total number of shares of common
stock authorized and reserved for issuance upon exercise of
options granted under this plan was 60,000. We had granted stock
options under this plan that are exercisable for the purchase of
16,000 common stock shares at $3.75 per share, on or before
September 30, 2011.
Our Board of Directors administers and interprets this plan and
had the authority to grant options to all eligible participants
and determine the basis upon which the options were to be
granted and the terms, and restrictions and conditions of the
options at the time of grant.
Options granted under this plan are exercisable in the amounts,
at the intervals and upon the terms as the option grant
provides. The purchase price of the common stock under the
option was determined by our Board of Directors, but can not be
less than the fair market value of our common stock on the date
of grant, where fair market value is equal to the last sale
price, or if no sale has occurred, the mean between the closing
high bid and low asked quotations on the principal securities
exchange on which our shares are listed, on the date of grant.
Upon the exercise of an option, the stock purchase price must be
paid in full, in cash by check or in our common stock held by
the option holder for more than six months or a combination of
cash and common stock.
78
The options are not transferable except by will, by the laws of
descent and distribution, by gift or a domestic relations order
to a family member. Family member transfers include
transfers to spouses, former spouses, children, step-children,
grandparents, parents and siblings (including in-laws), nieces
and nephew, including adoptive relationships, any person sharing
the optionees householder, or a trust or foundation in
which any of the foregoing persons (including the optionee) has
more than a 50% beneficial interest, or any other entity in
which any of these persons (including the optionee) owns more
than 50% of the voting interests.
All outstanding options granted under the plan will become fully
vested and exercisable, but limited to that number of shares of
stock that can be acquired without causing the optionee to have
an excess parachute payment as determined under
Section 280G of the Code, immediately prior to our
dissolution or liquidation, or any merger, consolidation or
combination in which we are not the surviving corporation,
provided that such change is not meant to merely change the
identity, form or place of the Company.
Director
Liability and Indemnification
As permitted by the provisions of the Oklahoma General
Corporation Act, our Certificate of Incorporation (the
Certificate) eliminates in certain circumstances the
monetary liability of our directors for a breach of their
fiduciary duty as directors. These provisions do not eliminate
the liability of a director.
|
|
|
|
|
for a breach of the directors duty of loyalty to us or our
shareholders;
|
|
|
|
for acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law;
|
|
|
|
for liability arising under Section 1053 of the Oklahoma General
Corporation Act (relating to the declaration of dividends and
purchase or redemption of shares in violation of the Oklahoma
General Corporation Act); or
|
|
|
|
for any transaction from which the director derived an improper
personal benefit.
|
In addition, these provisions do not eliminate liability of a
director for violations of federal securities laws, nor do they
limit our rights or the rights of our shareholders, in
appropriate circumstances, to seek equitable remedies such as
injunctive or other forms of non-monetary relief. Such remedies
may not be effective in all cases.
Our Bylaws provide that we will indemnify our directors and
officers. Under such provisions, any director or officer, who in
his or her capacity as an officer or director, is made or
threatened to be made, a party to any suit or proceeding, may be
indemnified if the director or officer acted in good faith and
in a manner he or she reasonably believed to be in or not
opposed to our best interest. The Bylaws further provide that
this indemnification is not exclusive of any other rights that
an officer or director may be entitled. Insofar as
indemnification for liabilities arising under the Bylaws or
otherwise may be permitted to our directors and officers, we
have been advised that in the opinion of the Securities and
Exchange Commission indemnification is against public policy and
is, therefore, unenforceable.
Furthermore, we have entered into indemnity and contribution
agreements with each of our directors and executive officers.
Under these indemnification agreements we have agreed to pay on
behalf of the indemnitee, and his executors, administrators and
heirs, any amount that he is or becomes legally obligated to pay
because the indemnitee served as one of our directors or
officers, or served as a director, officer, employee or agent of
a corporation, partnership, joint venture, trust or other
enterprise at our request or indemnitee was involved in any
threatened, pending or completed action, suit or proceeding by
us or in our right to procure a judgment in our favor by reason
that the indemnitee served as one of our directors or officers,
or served as a director, officer, employee or agent of a
corporation, partnership, joint venture, trust or other
enterprise at our request.
To be entitled to indemnification, indemnitee must have acted in
good faith and in a manner that he reasonably believed to be in
or not opposed to our best interests. In addition, no
indemnification is required if the indemnitee is determined to
be liable to us unless the court in which the legal proceeding
was brought determines that the indemnitee was entitled to
indemnification. The costs and expenses covered by these
79
agreements include expenses of investigations, judicial or
administrative proceedings or appeals, amounts paid in
settlement, attorneys fees and disbursements, judgments,
fines, penalties and expenses of enforcement of the
indemnification rights.
We maintain insurance to protect our directors and officers
against liability asserted against them in their official
capacities for events occurring after September 1, 2008.
This insurance protection covers claims and any related defense
costs of up to $10,000,000 based on alleged or actual securities
law violations, other than intentional dishonest or fraudulent
acts or omissions, or any willful violation of any statute, rule
or law, or claims arising out of any improper profit,
remuneration or advantage derived by an insured director or
officer. In addition, the insurance protection covers
non-indemnifiable losses on individual directors and officers up
to $5,000,000.
80
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
The following table sets forth as of December 30, 2010,
information related to each category of equity compensation plan
approved or not approved by our shareholders, including
individual compensation arrangements with our non-employee
directors. The equity compensation plans approved by our
shareholders are our 2008 Long-Term Incentive Plan, 2003 Stock
Option Plan and 2003 Non-Employee Stock Option Plan. All stock
options and rights to acquire our equity securities are
exercisable for or represent the right to purchase our common
stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities to be
|
|
|
|
|
|
Number of
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
Securities Remaining
|
|
|
|
Exercise of Outstanding
|
|
|
Exercise Price of
|
|
|
Available for Future
|
|
|
|
Options, Warrants
|
|
|
Outstanding Options,
|
|
|
Issuance Under Equity
|
|
Plan Category
|
|
and Rights
|
|
|
Warrants and Rights
|
|
|
Compensation Plans
|
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Long-Term Incentive Plan
|
|
|
229,398
|
|
|
$
|
1.71
|
|
|
|
2,640,602
|
|
2003 Stock Option Plan
|
|
|
16,000
|
|
|
$
|
3.75
|
|
|
|
|
|
2003 Non-Employee Stock Option Plan
|
|
|
16,000
|
|
|
$
|
3.75
|
|
|
|
|
|
Equity compensation plans not approved by security
holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued to SXJE, LLC
|
|
|
100,000
|
|
|
$
|
2.50
|
|
|
|
|
|
Warrants issued to ViewTrade Financial and its assigns
|
|
|
100,270
|
|
|
$
|
2.05
|
|
|
|
|
|
Options issued to employees
|
|
|
60,000
|
|
|
$
|
3.75
|
|
|
|
|
|
Options issued to directors
|
|
|
60,000
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
581,668
|
|
|
$
|
2.44
|
|
|
|
2,640,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our policies with respect to related party transaction are
included in more general conflict of interest policies and
practices set forth in our Code of Conduct.
Our Code of Conduct prohibits conflicts involving family
members, ownership in outside businesses, and outside
employment. Our directors, officers and employees and their
family members are not permitted to own, directly or indirectly,
a significant financial interest in any business enterprise that
does or seeks to do business with, or is in competition with, us
unless prior specific written approval has been granted by our
Board of Directors. As a guide, a significant financial
interest refers to an ownership interest of more than 1%
of the outstanding securities or capital value of the business
enterprise or that represents more than 5% of the total assets
of the director, officer, employee or family member.
Our Nominating and Corporate Governance Committee is charged
with reviewing conflicts of interests. If the matter cannot be
resolved by the committee, our Board of Directors may take
action, or in the case of a conflict among all or nearly all of
the members of our Board of Directors, the matter may be brought
to our shareholders.
Contained below is a description of transactions and proposed
transactions we entered into with our officers, directors and
shareholders that beneficially own more than 5% of our common
stock during 2009 and 2008. These transactions will continue in
effect and may result in conflicts of interest between us and
these individuals. Although our officers and directors have
fiduciary duties to us and our shareholders, there can be no
assurance that conflicts of interest will always be resolved in
favor of us and our shareholders.
Office Space Lease. In October 2008, we
entered into a month-month lease with Oklahoma Tower Realty
Investors, LLC which is controlled by Roy T. Oliver, one of our
greater than 5% shareholders and affiliates, for occupancy of
our and SDC Holdings, LLCs offices in Oklahoma City. Under
this lease arrangement, we are required to pay rent of
approximately $7,042 per month. Mr. Stanton Nelson, our
chief executive officer, owns a non-controlling interest in
Oklahoma Tower Realty Investors, LLC.
Construction of Leasehold Improvements. During
2008, we paid Specialty Construction Services, LLC approximately
$126,000 to construct the leasehold improvements at our and SDC
Holdings offices in Oklahoma City. During 2009, we paid
Specialty Construction Services, LLC approximately $255,000,
primarily for construction of leasehold improvements at our
Norman, Oklahoma facility. Non-controlling interests in
Specialty Construction Services, LLC are held by Roy T. Oliver,
one of our greater than 5% shareholders and affiliates, and
Mr. Stanton Nelson, our Chief Executive Officer.
Cash Deposit Accounts and Borrowings. As of
September 30, 2010, we have approximately $152,000 on
deposit at Valliance Bank. Valliance Bank is controlled by Roy
T. Oliver, one of our greater than 5% shareholders and
affiliates. In addition, our SMS operating segment is obligated
to Valliance Bank under certain sleep center capital notes
totaling approximately $189,000 at December 31, 2008. The
interest rates on the notes are fixed and range from 4.25% to
8.75%. Non-controlling interests in Valliance Bank are held by
Stanton Nelson, our Chief Executive Officer and Joseph
Harroz, Jr., one of our directors.
Time Sharing Agreements. On November 1,
2008, we entered into two time sharing agreements with R.T.
Oliver Investments, one of our greater than 5% stockholders,
pursuant to which we licensed, on a time-sharing basis, two
aircraft owned by R.T. Oliver Investments, for the period
from November 1, 2008 to December 31, 2010, unless
either agreement is earlier terminated. We are required to pay
R.T. Oliver Investments the actual expenses for each flight
conducted under the agreements as authorized by Federal Aviation
Regulations Part 91.501(d), in addition to any excise or
similar taxes assess by any governmental agency in connection
with any of our flights. For the fiscal years ended
December 31, 2008 and 2009, we paid R.T. Oliver
Investments, $24,715 and $23,964 for flights conducted under
these agreements.
We believe that the transactions described above were on terms
no less favorable to us than could have been obtained with
unrelated third parties. All material future transactions
between us and our officers, directors and 5% or greater
shareholders will be on terms no less favorable than could be
obtained from unrelated third parties and must be approved by a
majority of our disinterested-independent members of our Board
of Directors.
82
PRINCIPAL
STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our capital stock, as of December 27, 2010, by
the following:
|
|
|
|
|
each person, or group of affiliated persons, who is known by us
to beneficially own 5% or more of any class of our voting
securities;
|
|
|
|
|
|
each of our current directors;
|
|
|
|
|
|
each of our named executive officers; and
|
|
|
|
|
|
all current directors and executive officers as a group.
|
Beneficial ownership is determined according to the rules of the
SEC. Beneficial ownership means that a person has or shares
voting or investment power of a security, and includes shares
underlying options and warrants that are currently exercisable
or exercisable within 60 days after the measurement date.
The information in the table below is based on information
supplied by officers, directors and principal stockholders.
Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, based on the
information each of them has given to us, have sole investment
and voting power with respect to their shares, except where
community property laws may apply. Unless otherwise indicated,
we deem shares of common stock subject to options that are
exercisable within 60 days of December 27, 2010 to be
outstanding and beneficially owned by the person holding the
options for the purpose of computing percentage ownership of
that person, but we do not treat them as outstanding for the
purpose of computing the ownership percentage of any other
person.
Unless otherwise indicated, the address for each person or
entity named below is 210 Park Avenue, Suite 1350, Oklahoma
City, Oklahoma 73102.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Beneficial Ownership(1)
|
|
|
Shares
|
|
Rights To
|
|
Total
|
|
Ownership
|
Name (and Address) of Beneficial Owner
|
|
Owned
|
|
Acquire
|
|
Shares
|
|
Percent(2)
|
|
Roy T. Oliver(3)
|
|
|
7,028,992
|
|
|
|
|
|
|
|
7,028,992
|
|
|
|
24.3
|
%
|
101 N. Robinson, Ste. 900
Oklahoma City, Oklahoma 73102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oliver Company Holdings, LLC(3)
|
|
|
7,028,992
|
|
|
|
|
|
|
|
7,028,992
|
|
|
|
24.3
|
%
|
101 N. Robinson, Ste. 900
Oklahoma City, Oklahoma 73102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lewis P. Zeidner(7)
|
|
|
3,493,000
|
|
|
|
91,666
|
|
|
|
3,584,666
|
|
|
|
12.3
|
%
|
5400 Union Terrace Lane North
Plymouth, Minnesota 55442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stanton Nelson(7)(10)
|
|
|
2,733,072
|
|
|
|
19,000
|
|
|
|
2,752,072
|
|
|
|
9.5
|
%
|
101 North Robinson, Suite 900
Oklahoma City, Oklahoma 73102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalea Partners LP(4)
|
|
|
1,703,969
|
|
|
|
|
|
|
|
1,703,969
|
|
|
|
5.9
|
%
|
4801 Gaillardia Parkway, Suite 350
Oklahoma City, Oklahoma 73142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Malone Mitchell(4)
|
|
|
1,703,969
|
|
|
|
|
|
|
|
1,703,969
|
|
|
|
5.9
|
%
|
4801 Gaillardia Parkway, Suite 350
Oklahoma City, Oklahoma 73142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Oliver
|
|
|
1,657,608
|
|
|
|
15,000
|
|
|
|
1,672,608
|
|
|
|
5.8
|
%
|
101 N. Robinson, Ste. 900
Oklahoma City, OK 73072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black Oak II, LLC(6)
|
|
|
1,609,612
|
|
|
|
|
|
|
|
1,609,612
|
|
|
|
5.6
|
%
|
101 N. Robinson, Ste. 800
Oklahoma City, Oklahoma 73102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTV Investments, LTD(6)
|
|
|
1,609,612
|
|
|
|
|
|
|
|
1,609,612
|
|
|
|
5.6
|
%
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Beneficial Ownership(1)
|
|
|
Shares
|
|
Rights To
|
|
Total
|
|
Ownership
|
Name (and Address) of Beneficial Owner
|
|
Owned
|
|
Acquire
|
|
Shares
|
|
Percent(2)
|
|
101 N. Robinson, Ste. 800
Oklahoma City, Oklahoma 73102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. Mark Moore(6)
|
|
|
1,609,612
|
|
|
|
|
|
|
|
1,609,612
|
|
|
|
5.6
|
%
|
101 N. Robinson, Ste. 800
Oklahoma City, Oklahoma 73102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLW Securities LLC(5)
|
|
|
1,564,842
|
|
|
|
|
|
|
|
1,564,842
|
|
|
|
5.4
|
%
|
PO Box 54525
Oklahoma City, Oklahoma 73154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom Ward(5)
|
|
|
1,564,842
|
|
|
|
|
|
|
|
1,564,842
|
|
|
|
5.4
|
%
|
PO Box 54525
Oklahoma City, Oklahoma 73154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Harroz, Jr.(7)
|
|
|
241,392
|
|
|
|
15,000
|
|
|
|
256,392
|
|
|
|
0.9
|
%
|
Scott R. Mueller(7)
|
|
|
134,181
|
|
|
|
15,000
|
|
|
|
149,181
|
|
|
|
0.5
|
%
|
S. Edward Dakil, M.D.(7)
|
|
|
133,571
|
|
|
|
15,000
|
|
|
|
148,571
|
|
|
|
0.5
|
%
|
Grant A. Christianson(7)(8)
|
|
|
119,048
|
|
|
|
|
|
|
|
119,048
|
|
|
|
0.4
|
%
|
Edward M. Carriero, Jr.(7)
|
|
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
0.2
|
%
|
Steven List(7)
|
|
|
40,000
|
|
|
|
|
|
|
|
40,000
|
|
|
|
0.1
|
%
|
Executive Officers and Directors as a group (8 individuals)
|
|
|
6,894,264
|
|
|
|
205,666
|
|
|
|
7,099,930
|
|
|
|
23.6
|
%
|
|
|
|
(1) |
|
Shares not outstanding but deemed beneficially owned by virtue
of the right of a person or members of a group to acquire them
within 60 days are treated as outstanding for determining
the amount and percentage of common stock owned by such person.
To our knowledge, each named person has sole voting and sole
investment power with respect to the shares shown except as
noted, subject to community property laws, where applicable. |
|
|
|
(2) |
|
Rounded to the nearest one-tenth of one percent, based upon
28,953,611 shares of common stock outstanding. |
|
|
|
(3) |
|
Oliver Company Holdings, LLC is controlled by Roy T. Oliver and
each is deemed the beneficial owner of the shares of common
stock. 1,642,608 shares of common stock have been pledged
to Oliver Company Holdings, LLC, as a security interest for
payment of principal and accrued and unpaid interest on a
promissory note issued to the holder on January 31, 2007,
to allow the holder to purchase membership interest of SDOC
Investors, LLC, which we exchanged for shares of common stock in
the Graymark Acquisition. All outstanding amounts on the
promissory note are due on January 31, 2010, or upon
earlier demand of the lender. |
|
|
|
(4) |
|
Dalea Partners, LP is controlled by Malone Mitchell and each is
deemed the beneficial owner of the shares of common stock. |
|
|
|
(5) |
|
TLW Securities LLC is controlled by Tom Ward and each is deemed
the beneficial owner of the shares of common stock. |
|
|
|
(6) |
|
Black Oak Investments II, LLC and MTV Investments, LTD are
controlled by P. Mark Moore and each is deemed the beneficial
owner of the shares of common stock. |
|
|
|
(7) |
|
The named person is an executive officer or a director or both. |
|
|
|
(8) |
|
Shares owned include 90,000 shares received through a
restricted stock grant award. These shares vest as follows:
45,000 shares on August 1, 2011, 30,000 shares on
August 1, 2016 and 15,000 shares on August 1,
2013. |
84
DESCRIPTION
OF CAPITAL STOCK
The following is a summary of the material terms of our capital
stock and provisions of our amended and restated certificate of
incorporation and amended and restated bylaws. This summary does
not purport to be complete and is qualified in its entirety by
the provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, copies of which
will be filed as exhibits to the registration statement of which
this prospectus is a part. Our authorized capital stock consists
of 500,000,000 shares of common stock, par value $0.0001
per share, 28,953,611 shares of which are outstanding, and
10,000,0000 shares of preferred stock, par value $0.0001
per share, none of which are outstanding.
Common
Stock
The rights, privileges, disabilities and restrictions in general
of the holders of our outstanding shares of the common stock are
as follows:
|
|
|
|
|
the right to receive ratably dividends, if any, as may be
declared from time to time by the Board of Directors out of
assets legally available therefor, subject to the payment of
preferential dividends with respect to our then outstanding
preferred stock;
|
|
|
|
the right to share ratably in all assets available for
distribution to the common stock shareholders after payment of
our liabilities in the event of our liquidation, dissolution and
winding-up,
subject to the prior distribution rights of the holders of our
then outstanding preferred stock;
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|
|
the right to one vote per share on matters submitted to a vote
by our common stock shareholders;
|
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|
|
no preferential or preemptive right and no subscription,
redemption or conversion privilege with respect to the issuance
of additional shares of our common stock; and
|
|
|
|
no cumulative voting rights, which means that the holders of a
majority of shares voting for the election of directors can
elect all members of our Board of Directors then subject to
election.
|
In general, a majority vote of shares represented at a meeting
of common stock shareholders at which a quorum (a majority of
the outstanding shares of common stock) is present, is
sufficient for all actions that require the vote or concurrence
of shareholders, subject to and possibly in connection with the
voting rights of the holders of our then outstanding preferred
stock and entitled to vote with the holders of our common stock.
Upon issuance of the common stock offered under the offering,
all of the outstanding shares of our common stock will be fully
paid and non-assessable.
Preferred
Stock
Our authorized preferred stock may be issued from time to time
in one or more series. Our Board of Directors, without further
approval of the common stock shareholders, is authorized to fix
the relative rights, preferences, privileges and restrictions
applicable to each series of our preferred stock. We believe
that having this class of preferred stock provides greater
flexibility in financing, acquisitions and other corporate
activities. While there are no current plans, commitments or
understandings, written or oral, to issue any of our preferred
stock, in the event of any issuance, our common stock
shareholders will not have any preemptive or similar rights to
acquire any of the preferred stock. Issuance of preferred stock
could adversely affect the voting power of the holders of our
then outstanding common stock, the likelihood that the holders
will receive dividend payments and payments upon liquidation and
could have the effect of delaying or preventing a change in
shareholder and management control.
Transfer
Agent and Registrar
Computershare is the registrar and transfer agent of our common
stock. The mailing address for Computershare is
P.O. Box 43078, Providence, RI
02940-3078.
85
Shareholder
Action
Under our bylaws, the affirmative vote of the holders of a
majority of the shares of the common stock voted at a meeting of
shareholders is sufficient to authorize, affirm, ratify or
consent to any act or action required of or by the holders of
the common stock, except as otherwise provided by the Oklahoma
General Corporation Act.
Under the Oklahoma General Corporation Act, our shareholders may
take actions by written consent without holding a meeting. The
written consent must be signed by the holders of a sufficient
number of shares to approve the act or action had all of our
outstanding shares of capital stock entitled to vote thereon
been present at a meeting. In this event, we are required to
provide prompt notice of any corporate action taken without a
meeting to our shareholders who did not consent in writing to
the act or action. However, any time that we have 1,000 or more
shareholders of record, any act or action required of or by the
holders of our capital stock entitled to vote thereon may only
be taken by unanimous affirmative written consent of the
shareholders or a shareholder meeting.
Anti-Takeover
Provisions
Our certificate of incorporation and the Oklahoma General
Corporation Act include a number of provisions that may have the
effect of encouraging persons considering unsolicited tender
offers or other unilateral takeover proposals to negotiate with
our Board of Directors rather than pursue non-negotiated
takeover attempts. We believe that the benefits of these
provisions outweigh the potential disadvantages of discouraging
the proposals because, among other things, negotiation of the
proposals might result in an improvement of the takeover terms.
The description below related to provisions of our certificate
of incorporation is intended as a summary only and is qualified
in its entirety by reference to our certificate of
incorporation. Our certificate of incorporation authorizes the
issuance of the preferred stock in classes. Our Board of
Directors is authorized to set and determine the voting rights,
redemption rights, conversion rights and other rights relating
to the class of preferred stock. In some circumstances, the
preferred stock could be issued and have the effect of
preventing a merger, tender offer or other takeover attempt
which our Board of Directors opposes.
86
UNDERWRITING
We intend to engage an investment bank to act as sole
underwriter for the offering. Under the terms and subject to the
conditions contained in an underwriting agreement that we will
enter into with the underwriter, the underwriter has agreed to
purchase, and we have agreed to sell, the number of shares
indicated below:
|
|
|
|
|
Underwriter
|
|
Number of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
We expect that the underwriter will offer the shares of common
stock subject to its acceptance of the shares from us and
subject to prior sale. The underwriting agreement will provides
that the obligations of the underwriter to pay for and accept
delivery of the common stock offered by this prospectus are
subject to the approval of certain legal matters by its counsel
and to certain other conditions. The underwriter will be
obligated to take and pay for all of the shares of common stock
if any such shares are taken. However, the underwriter will not
be required to take or pay for the shares covered by the
underwriters over-allotment option described below.
Over-Allotment
Option
We intend to grant to the underwriter an option, exercisable for
30 days from the date of this prospectus to buy up to
additional shares of common stock at the public offering price
set forth on the cover page of this prospectus, less
underwriting discounts and commissions. The underwriter may
exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of
the common stock offered by this prospectus.
Commissions
and Discounts
We expect that underwriter offer the common stock to the public
at the price set forth on the cover page of this prospectus and
to certain dealers at that price less a concession.
The following table shows the public offering price, the
estimated underwriting discounts and commissions payable to the
underwriter by us and the proceeds, before expenses, to us. Such
amounts are shown assuming both no exercise and full exercise of
the underwriters over-allotment option to purchase
additional shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Total
|
|
|
Without over-
|
|
With over-
|
|
Without over-
|
|
With over-
|
|
|
allotment
|
|
allotment
|
|
allotment
|
|
allotment
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and commissions paid by us
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Proceeds to us before expenses
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
We estimate that the total expenses of this offering payable by
us, not including the estimated underwriting discounts and
commissions, will be approximately $525,000.
Indemnification
and Contribution
We expect to agree to indemnify the underwriter and its
controlling persons against certain liabilities, including
liabilities under the Securities Act. If we are unable to
provide this indemnification, we will contribute to payments the
underwriter and its controlling persons may be required to make
in respect of those liabilities.
87
Lock-up
Agreements
We intend to, and expect our executive officers and directors,
and certain of our shareholders to agreed with the underwriter,
subject to certain exceptions, not to sell or transfer any of
our shares of common stock or any securities convertible into or
exercisable or exchangeable for our common stock, for
90 days after the date of this prospectus without first
obtaining the written consent of the underwriter.
Nasdaq
Capital Market Listing
We are listed on Nasdaq Capital Market under the symbol
GRMH.
Selling
Restrictions
No action has been taken in any jurisdiction (except in the
United States) that would permit a public offering of our common
stock, or the possession, circulation or distribution of this
prospectus or any other material relating to us or our common
stock in any jurisdiction where action for that purpose is
required. Accordingly, shares of our common stock may not be
offered or sold, directly or indirectly, and neither this
prospectus nor any other offering material or advertisements in
connection with our common stock may be distributed or
published, in or from any country or jurisdiction except in
compliance with any applicable rules and regulations of any such
country or jurisdiction.
LEGAL
MATTERS
Greenberg Traurig, LLP, Boston, Massachusetts is acting as
securities counsel for us in connection with this offering. The
validity of the issuance of the shares of common stock offered
by this prospectus will be passed upon for us by our counsel,
McAfee & Taft, P.C., Oklahoma City, Oklahoma.
Goodwin Procter LLP, New York, New York is acting as counsel for
the underwriter in connection with this offering.
EXPERTS
The consolidated financial statements and schedules of Graymark
Healthcare, Inc. and its subsidiaries as of December 31,
2009 and 2008, and for each of the years in the periods ended
December 31, 2009, 2008 and 2007, appearing in this
Prospectus and Registration Statement have been audited Eide
Bailly LLP, or its predecessor, Murrell, Hall,
McIntosh & Co., PLLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act that registers the shares of our common
stock to be sold in this offering. The registration statement,
including the attached exhibits and schedules, contains
additional relevant information about us and our capital stock.
The rules and regulations of the SEC allow us to omit from this
prospectus certain information included in the registration
statement. For further information about us and our common
stock, you should refer to the registration statement and the
exhibits and schedules filed with the registration statement.
With respect to the statements contained in this prospectus
regarding the contents of any agreement or any other document,
in each instance, the statement is qualified in all respects by
the complete text of the agreement or document, a copy of which
has been filed as an exhibit to the registration statement. In
addition, we file annual, quarterly, and current reports, proxy
statements and other information with the SEC under the Exchange
Act. You may obtain copies of this information by mail from the
Public Reference Room of the SEC at 100 F Street,
N.E., Washington, D.C. 20549, at prescribed rates and you
may read the information in person free of charge. You may
obtain information on the operation of the public reference
rooms by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an internet website that contains
reports, proxy statements and other information about issuers
that file electronically with the SEC. The address of that
website is www.sec.gov.
88
DOCUMENTS
INCORPORATED BY REFERENCE
The SEC allows us to incorporate by reference
information we file with it, which means that we can disclose
important information to you by referring you to other
documents. The information incorporated by reference is
considered to be a part of this prospectus.
We incorporate by reference into this prospectus the documents
listed below.
|
|
|
|
|
Our Annual Report on
Form 10-K
for the year ended December 31, 2009; and
|
|
|
|
|
|
All other reports filed pursuant to Section 13(a) or 15(d)
of the Exchange Act or proxy or information statements filed
pursuant to Section 14 of the Exchange Act since the end of
the fiscal year covered by the annual report referred to in
above.
|
Pursuant to Rule 412 under the Securities Act, any
statement contained in a document incorporated or deemed to be
incorporated by reference into this prospectus will be deemed to
be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus or any
other subsequently filed document that is deemed to be
incorporated by reference into this prospectus modifies or
supersedes the statement. Any statement so modified or
superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.
Our filings with the SEC, including our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports, are available free of charge on
our website (www.graymark.com) as soon as reasonably practicable
after they are filed with, or furnished to, the SEC. Our website
and the information contained on that site, or connected to that
site, are not incorporated into and are not a part of this
prospectus. You may also obtain a copy of these filings at no
cost by writing or telephoning us at the following address:
Graymark Healthcare, Inc.
210 Park Avenue, Suite 1350
Oklahoma City, OK 73102
Attention: General Counsel
Telephone:
(405) 601-5300
Except for the documents incorporated by reference as noted
above, we do not intend to incorporate into this prospectus any
of the information included on our website.
89
GRAYMARK
HEALTHCARE, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
|
|
F-3
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2009 and 2008
|
|
|
F-4
|
|
Consolidated Statements of Shareholders Equity for the
Years Ended December 31, 2009 and 2008
|
|
|
F-5
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009 and 2008
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7
|
|
F-1
Report
of Independent Registered Public Accounting Firm
To the Audit Committee, Board of Directors,
and Shareholders of Graymark Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of
Graymark Healthcare, Inc. as of December 31, 2009 and 2008,
and the related consolidated statements of operations,
shareholders equity, and cash flows for the years ended
December 31, 2009 and 2008. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatements. The Company is
not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2009
and 2008 and the results of its consolidated operations and its
consolidated cash flows for the years ended December 31,
2009 and 2008, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Eide Bailly LLP
March 31, 2010
except for Notes 5 and 9,
as to which date is December 30, 2010
Greenwood Village, Colorado
F-2
GRAYMARK
HEALTHCARE, INC.
Consolidated
Balance Sheets
As of
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
1,093,645
|
|
|
$
|
13,728,534
|
|
Accounts receivable, net of allowance for contractual
adjustments and doubtful accounts of $9,772,580 and $12,977,626,
respectively
|
|
|
4,057,959
|
|
|
|
5,747,194
|
|
Inventories
|
|
|
351,585
|
|
|
|
194,764
|
|
Current assets from discontinued operations
|
|
|
16,312,028
|
|
|
|
18,006,593
|
|
Other current assets
|
|
|
532,323
|
|
|
|
207,539
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,347,540
|
|
|
|
37,884,624
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
5,318,680
|
|
|
|
4,013,938
|
|
Intangible assets, net
|
|
|
5,871,578
|
|
|
|
547,278
|
|
Goodwill
|
|
|
20,516,894
|
|
|
|
16,605,785
|
|
Other assets from discontinued operations
|
|
|
21,087,323
|
|
|
|
21,938,336
|
|
Other assets
|
|
|
725,262
|
|
|
|
343,669
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
75,867,277
|
|
|
$
|
81,333,630
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
342,362
|
|
|
$
|
464,478
|
|
Accrued liabilities
|
|
|
1,752,598
|
|
|
|
1,262,252
|
|
Short-term debt
|
|
|
195,816
|
|
|
|
565,190
|
|
Current portion of long-term debt
|
|
|
480,201
|
|
|
|
576,568
|
|
Current liabilities from discontinued operations
|
|
|
7,890,407
|
|
|
|
12,673,528
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,661,384
|
|
|
|
15,542,016
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
22,215,875
|
|
|
|
17,511,727
|
|
Liabilities from discontinued operations
|
|
|
23,694,319
|
|
|
|
25,736,326
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
56,571,578
|
|
|
|
58,790,069
|
|
Equity:
|
|
|
|
|
|
|
|
|
Graymark Healthcare shareholders equity:
|
|
|
|
|
|
|
|
|
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; 28,989,145 and 27,719,113 issued and outstanding,
respectively
|
|
|
2,899
|
|
|
|
2,772
|
|
Paid-in capital
|
|
|
29,086,750
|
|
|
|
26,937,736
|
|
Accumulated deficit
|
|
|
(9,869,471
|
)
|
|
|
(4,681,575
|
)
|
|
|
|
|
|
|
|
|
|
Total Graymark Healthcare shareholders equity
|
|
|
19,220,178
|
|
|
|
22,258,933
|
|
Noncontrolling interest
|
|
|
75,521
|
|
|
|
284,628
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
19,295,699
|
|
|
|
22,543,561
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
75,867,277
|
|
|
$
|
81,333,630
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-3
GRAYMARK
HEALTHCARE, INC.
Consolidated
Statements of Operations
For the
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
13,529,092
|
|
|
$
|
12,590,350
|
|
Product sales
|
|
|
4,042,447
|
|
|
|
2,701,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,571,539
|
|
|
|
15,292,164
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
6,018,735
|
|
|
|
5,302,200
|
|
Cost of sales
|
|
|
1,716,350
|
|
|
|
477,718
|
|
Selling, general and administrative
|
|
|
12,501,994
|
|
|
|
7,726,693
|
|
Change in accounting estimate
|
|
|
2,648,207
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,074,132
|
|
|
|
598,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,959,418
|
|
|
|
14,105,238
|
|
|
|
|
|
|
|
|
|
|
Other (Expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(906,870
|
)
|
|
|
(696,181
|
)
|
Other expense
|
|
|
(45,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
(952,724
|
)
|
|
|
(696,181
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
(7,340,603
|
)
|
|
|
490,745
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
(7,340,603
|
)
|
|
|
490,745
|
|
Income from discontinued operations, net of taxes
|
|
|
1,998,901
|
|
|
|
806,623
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(5,341,702
|
)
|
|
|
1,297,368
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
(153,806
|
)
|
|
|
552,970
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Graymark Healthcare
|
|
$
|
(5,187,896
|
)
|
|
$
|
744,398
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(0.25
|
)
|
|
|
0.00
|
|
Income from discontinued operations
|
|
|
0.07
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.18
|
)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
28,414,508
|
|
|
|
25,885,628
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding
|
|
|
28,414,508
|
|
|
|
26,102,841
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-4
GRAYMARK
HEALTHCARE, INC.
Consolidated
Statements of Shareholders Equity
For the
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Balance, December 31, 2007
|
|
|
22,190,400
|
|
|
$
|
2,219
|
|
|
$
|
7,286,636
|
|
|
$
|
(5,425,973
|
)
|
|
$
|
629,916
|
|
Issuance of common stock in connection with private placement
offering
|
|
|
599,999
|
|
|
|
60
|
|
|
|
938,440
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with private placement
offering
|
|
|
3,344,447
|
|
|
|
335
|
|
|
|
15,049,712
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for payment of convertible debt
|
|
|
750,000
|
|
|
|
75
|
|
|
|
749,925
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in
roll-up of
minority interest holders
|
|
|
404,089
|
|
|
|
40
|
|
|
|
1,616,316
|
|
|
|
|
|
|
|
(617,645
|
)
|
Issuance of common stock in connection with acquisition
|
|
|
130,435
|
|
|
|
13
|
|
|
|
899,987
|
|
|
|
|
|
|
|
|
|
Issuance of stock options in connection with acquisition
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
Cashless exercise of warrants
|
|
|
149,723
|
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
150,000
|
|
|
|
15
|
|
|
|
336,735
|
|
|
|
|
|
|
|
|
|
Fractional shares from reverse stock split
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(378,266
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
744,398
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552,970
|
|
Income from discontinued operations attributable to
noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
27,719,113
|
|
|
|
2,772
|
|
|
|
26,937,736
|
|
|
|
(4,681,575
|
)
|
|
|
284,628
|
|
Issuance of common stock in connection with acquisition
|
|
|
752,795
|
|
|
|
75
|
|
|
|
1,543,925
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
482,133
|
|
|
|
48
|
|
|
|
500,715
|
|
|
|
|
|
|
|
|
|
Stock-based professional services
|
|
|
|
|
|
|
|
|
|
|
104,378
|
|
|
|
|
|
|
|
|
|
Cashless exercise of warrants
|
|
|
35,104
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Contributions from noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,250
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96,551
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,187,896
|
)
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
28,989,145
|
|
|
$
|
2,899
|
|
|
$
|
29,086,750
|
|
|
$
|
(9,869,471
|
)
|
|
$
|
75,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-5
GRAYMARK
HEALTHCARE, INC.
Consolidated
Statements of Cash Flows
For the
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,187,896
|
)
|
|
$
|
744,398
|
|
Less: Net income (loss) from discontinued operations
|
|
|
1,998,901
|
|
|
|
806,623
|
|
|
|
|
|
|
|
|
|
|
Net income(loss) from continuing operations
|
|
|
(7,186,797
|
)
|
|
|
(62,225
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,074,132
|
|
|
|
598,627
|
|
Disposal of retired fixed assets
|
|
|
77,916
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(153,806
|
)
|
|
|
552,970
|
|
Stock-based compensation
|
|
|
500,763
|
|
|
|
336,750
|
|
Stock-based professional services
|
|
|
104,378
|
|
|
|
|
|
Changes in assets and liabilities (net of acquisitions) -
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,146,689
|
|
|
|
(2,084,150
|
)
|
Inventories
|
|
|
(78,463
|
)
|
|
|
(8,550
|
)
|
Other assets
|
|
|
(663,771
|
)
|
|
|
(215,827
|
)
|
Accounts payable
|
|
|
(221,768
|
)
|
|
|
(24,967
|
)
|
Accrued liabilities
|
|
|
2,304
|
|
|
|
763,091
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities from continuing
operations
|
|
|
(3,398,423
|
)
|
|
|
(144,281
|
)
|
Net cash provided by operating activities from discontinued
operations
|
|
|
723,493
|
|
|
|
372,999
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(2,674,930
|
)
|
|
|
228,718
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Cash received from acquisitions
|
|
|
259,163
|
|
|
|
|
|
Purchase of businesses
|
|
|
(9,056,000
|
)
|
|
|
(1,446,600
|
)
|
Purchase of property and equipment
|
|
|
(1,117,618
|
)
|
|
|
(1,135,016
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities from continuing
operations
|
|
|
(9,914,455
|
)
|
|
|
(2,581,616
|
)
|
Net cash (used in) investing activities from discontinued
operations
|
|
|
(263,336
|
)
|
|
|
(10,301,550
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(10,177,791
|
)
|
|
|
(12,883,166
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
15,988,547
|
|
Debt proceeds
|
|
|
5,407,901
|
|
|
|
2,503,348
|
|
Debt payments
|
|
|
(2,393,961
|
)
|
|
|
(1,604,097
|
)
|
Contributions from noncontrolling interests
|
|
|
41,250
|
|
|
|
|
|
Distributions to noncontrolling interests
|
|
|
(96,551
|
)
|
|
|
(378,266
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities from continuing
operations
|
|
|
2,958,639
|
|
|
|
16,509,532
|
|
Net cash provided by (used in) financing activities from
discontinued operations
|
|
|
(3,595,622
|
)
|
|
|
9,452,360
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(636,983
|
)
|
|
|
25,961,892
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(13,489,704
|
)
|
|
|
13,307,444
|
|
Cash and cash equivalents at beginning of period
|
|
|
15,380,310
|
|
|
|
2,072,866
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
1,890,606
|
|
|
|
15,380,310
|
|
Cash and cash equivalents of discontinued operations at end of
period
|
|
|
796,961
|
|
|
|
1,651,776
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations at end of
period
|
|
$
|
1,093,645
|
|
|
$
|
13,728,534
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-6
GRAYMARK
HEALTHCARE, INC.
Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2009 and 2008
|
|
Note 1
|
Nature of
Business
|
Graymark Healthcare, Inc. (the Company) is organized
under the laws of the state of Oklahoma and is a diversified
medical holding company that operates in two operating segments:
Sleep Management Solutions (SMS) and ApothecaryRx.
The Companys first operating segment, SMS, is one of the
largest providers of care management solutions to the sleep
disorder market based on number of independent sleep care
centers and hospital sleep diagnostic programs operated in the
United States. The Company provides a comprehensive diagnosis
and care management solution for patients suffering from sleep
disorders. The Companys second operating segment,
ApothecaryRx, operates independent retail pharmacy stores
selling prescription drugs, non-prescription drugs, and an
assortment of general merchandise.
Through SMS, the Company provides diagnostic sleep testing
services and care management solutions for people with chronic
sleep disorders. In addition, the Company sells equipment and
related supplies and components used to treat sleep disorders.
The Companys products and services are used primarily by
patients with obstructive sleep apnea, or OSA. SMS sleep centers
provide monitored sleep diagnostic testing services to determine
sleep disorders in the patients being tested. The majority of
the sleep testing is to determine if a patient has OSA. A
continuous positive airway pressure, or CPAP, device is the
American Academy of Sleep Medicines, or AASM, preferred
method of treatment for obstructive sleep apnea. The
Companys sleep diagnostic facilities also determine the
correct pressure settings for patient treatment with positive
airway pressure. SMS sells CPAP devices and supplies to patients
who have tested positive for sleep apnea and have had their
positive airway pressure determined. There are noncontrolling
interest holders in some of the SMS testing facilities,
who are typically physicians in the geographical area being
served by the diagnostic sleep testing facility.
Through our ApothecaryRx segment, the Company operates
independent retail pharmacy stores selling prescription drugs
and a small assortment of general merchandise, including
diabetic merchandise, non-prescription drugs, beauty products
and cosmetics, seasonal merchandise, greeting cards and
convenience foods. As of December 31, 2009, the Company
owned and operated 18 retail pharmacies located in Colorado,
Illinois, Missouri, Minnesota, and Oklahoma. The Company has
historically grown its pharmacy business by acquiring
financially successful independently-owned retail pharmacies
from long-term owners that were approaching retirement. The
Companys acquired pharmacies have successfully maintained
market share due to their convenient proximity to healthcare
providers and services, high customer service levels, longevity
in the community, competitive pricing. Additionally,
ApothecaryRx independent pharmacies offer supportive services
and products such as pharmaceutical compounding, durable medical
equipment, and assisted and group living facilities.
ApothecaryRx pharmacies are located in mid-size,
economically-stable communities and the Company believes that a
significant amount of the value of our pharmacies resides in
retaining the historical pharmacy name and key staff
relationships in the community.
On September 1, 2010, the Company executed an Asset
Purchase Agreement, which was subsequently amended on
October 29, 2010, providing for the sale of substantially
all of the assets of the Companys subsidiary,
ApothecaryRx, LLC (ApothecaryRx). ApothecaryRx
operates 18 retail pharmacy stores selling prescription drugs
and a small assortment of general merchandise, including
diabetic merchandise, non-prescription drugs, beauty products
and cosmetics, seasonal merchandise, greeting cards and
convenience foods. The closing of the sale of ApothecaryRx
occurred in December 2010. As a result of the sale of
ApothecaryRx, the related assets, liabilities, results of
operations and cash flows of ApothecaryRx have been classified
as discontinued operations in the accompanying consolidated
financial statements. See Note 5 Discontinued
Operations.
F-7
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Consolidation The accompanying consolidated
financial statements include the accounts of Graymark
Healthcare, Inc. and its wholly owned, majority owned and
controlled subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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
Sleep center services and product sales from our SMS operating
segment are recognized in the period in which services and
related products are provided to customers and are recorded at
net realizable amounts estimated to be paid by customers and
third-party payors. Revenues from some of our product sales are
paid over a specified rental period, typically 10 to
13 months. The Company recognizes this revenue in the month
the rental commitment is entered into along with a reserve for
estimated returns. The Companys newly acquired Somni
business units, recognize the revenue on these sales as the
monthly payments become due. The Company plans to adopt a
unified revenue recognition practice for these transactions
during 2010. Some of our services are provided under management
service agreements and revenue from those agreements is
recognized in the period services are provided. Other than
services provided under a management service agreement,
insurance benefits are assigned to us and, accordingly, we bill
on behalf of our customers. The Company has established an
allowance to account for contractual adjustments that result
from differences between the amount billed and the expected
realizable amount. Actual adjustments that result from
differences between the payment amount received and the expected
realizable amount are recorded against the allowance for
contractual adjustments and are typically identified and
ultimately recorded at the point of cash application or when
otherwise determined pursuant to our collection procedures.
Revenues in the accompanying consolidated financial statements
are reported net of such adjustments.
Pharmacy product sales from the Companys ApothecaryRx
operating segment are recorded at the time the customer takes
possession of the merchandise. Customer returns are immaterial
and are recorded at the time merchandise is returned. Sales
taxes are not included in revenue.
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
and/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. Specifically, the complexity of
many third-party billing arrangements and the uncertainty of
reimbursement amounts for certain services from certain payers
may result in adjustments to amounts originally recorded.
Included in accounts receivable are earned but unbilled
receivables. Unbilled accounts receivable represent charges for
services delivered to customers for which invoices have not yet
been generated by the billing system. Prior to the delivery of
services or equipment and supplies to customers, we perform
certain certification and approval procedures to ensure
collection is reasonably assured and that unbilled accounts
receivable are recorded at net amounts expected to be paid by
customers and third-party payers. Billing delays, ranging from
several weeks to several months, can occur due to delays in
obtaining certain required payer-specific documentation from
internal and external sources, interim transactions occurring
between cycle billing dates established for each customer within
the billing system and new sleep centers awaiting assignment of
new provider enrollment identification numbers. In the event
that a third-party payer does not accept the claim for payment,
the customer is ultimately responsible.
The Company performs analysis to evaluate the net realizable
value of accounts receivable on a quarterly basis. Specifically,
the Company considers historical realization data, accounts
receivable aging trends, other operating trends and relevant
business conditions. Because of continuing changes in the health
care industry and third-party reimbursement, it is possible that
the Companys estimates could change, which could have a
material impact on its operations and cash flows.
F-8
During the years ended December 31, 2009 and 2008, the
Companys revenue payer mix by operating segment was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ApothecaryRx
|
|
|
|
|
(Discontinued
|
|
|
SMS
|
|
Operations)
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Managed care organizations
|
|
|
78
|
%
|
|
|
94
|
%
|
|
|
35
|
%
|
|
|
40
|
%
|
Medicaid / Medicare
|
|
|
18
|
%
|
|
|
6
|
%
|
|
|
50
|
%
|
|
|
41
|
%
|
Private-pay
|
|
|
4
|
%
|
|
|
<1
|
%
|
|
|
15
|
%
|
|
|
19
|
%
|
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.
Accounts receivable Accounts receivable are
reported net of allowances for contractual sales adjustments and
uncollectible accounts of $9,772,580 and $12,977,626 as of
December 31, 2009 and 2008, respectively. The majority of
the Companys accounts receivable is due from private
insurance carriers, Medicaid / Medicare and other
third party payors, as well as from customers under co-insurance
and deductible provisions.
The Companys allowance for contractual adjustments and
uncollectible accounts is primarily attributable to the
Companys SMS operating segment. Third-party reimbursement
is a complicated process that involves submission of claims to
multiple payers, each having its own claims requirements. In
some cases, the ultimate collection of accounts receivable
subsequent to the service dates may not be known for several
months. The Company has established an allowance to account for
sales adjustments that result from differences between the
payment amounts received from customers and third-party payers
and the expected realizable amounts. The percentage and amounts
used to record the allowance for doubtful accounts are supported
by various methods including current and historical cash
collections, sales adjustments, and aging of accounts receivable.
Approximately 37% of the Companys accounts receivable is
from Medicare and Medicaid programs and another 47% are due from
major insurance companies. The Company has not experienced
losses due to the inability of these major insurance companies
to meet their financial obligations and does not foresee that
this will change in the near future.
Restricted cash As of December 31, 2009,
the Company had long-term restricted cash of $236,000 included
in other current assets in the accompanying condensed
consolidated balance sheets. This amount is pledged as
collateral to the Companys senior bank debt and bank line
of credit. There was no restricted cash at December 31,
2008.
Inventories Inventories are stated at the
lower of cost or market and include the cost of products
acquired for sale. The Company accounts for inventories using
the first in first out method of accounting for
substantially all of its inventories. Independent physical
inventory counts are taken on a regular basis in each retail
pharmacy store.
Property and equipment Property and equipment
is stated at cost and depreciated using the straight line method
to depreciate the cost of various classes of assets over their
estimated useful lives. At the time assets are sold or otherwise
disposed of, the cost and accumulated depreciation are
eliminated from the asset and depreciation accounts; profits and
losses on such dispositions are reflected in current operations.
Fully depreciated assets are written off against accumulated
depreciation. Expenditures for major renewals and betterments
that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are
charged to expense as incurred.
F-9
The estimated useful lives of the Companys property and
equipment are as follows:
|
|
|
Asset Class
|
|
Useful Life
|
|
Equipment
|
|
5 to 7 years
|
Software
|
|
3 to 7 years
|
Furniture and fixtures
|
|
7 years
|
Leasehold improvements
|
|
25 years or remaining lease period, whichever is shorter
|
Vehicles
|
|
3 to 5 years
|
Goodwill and Intangible Assets Goodwill and
other indefinitely lived intangible assets are not
amortized, but are subject to annual impairment reviews, or more
frequent reviews if events or circumstances indicate there may
be an impairment of goodwill.
Intangible assets other than goodwill which include customer
relationships, customer files, covenants not to compete,
trademarks and payor contracts are amortized over their
estimated useful lives using the straight line method. The
remaining lives range from three to fifteen years. The Company
evaluates the recoverability of identifiable intangible asset
whenever events or changes in circumstances indicate that an
intangible assets carrying amount may not be recoverable.
Other Assets Included in other assets is an
investment in a non-controlled entity in the amount of $200,000.
The Company accounts for this investment using the cost method
which requires the investment to be recorded at cost plus any
related guaranteed debt or other contingencies. Any earnings are
recorded in the period received.
Noncontrolling Interests Noncontrolling
interests in the results of operations of consolidated
subsidiaries represents the noncontrolling shareholders
share of the income or loss of the various consolidated
subsidiaries. The noncontrolling interests in the consolidated
balance sheet reflect the original investment by these
noncontrolling shareholders in these consolidated subsidiaries,
along with their proportional share of the earnings or losses of
these subsidiaries less distributions made to these
noncontrolling interest holders.
Advertising Costs Advertising and sales
promotion costs are expensed as incurred. Advertising expense
for 2009 and 2008 totaled $109,218 and $78,321, respectively.
Advertising expense for 2009 and 2008, included in discontinued
operations, was $255,903 and $255,803, respectively.
Vendor Allowances In conjunction with certain
pharmacy acquisitions, the Company has received advance discount
payments from a vendor in amounts ranging from $150,000 to
$300,000. These discounts were initially deferred and included
in accrued liabilities on the accompanying consolidated balance
sheet. The deferred amounts are each being amortized to reduce
the cost of sales over the sixty month life of each discount
agreement on a straight line basis. During 2009 and 2008,
$710,052 and $571,834, respectively, of these discounts was
amortized to reduce cost of sales. The remaining allowance in
other current liabilities from discontinued operations was
$2,015,448 and $2,726,500 as of December 31, 2009 and 2008,
respectively.
Acquisition Costs Acquisition costs are
charged directly to expense when incurred.
Discontinued Film Operations In conjunction
with the Graymark Acquisition, management of the Company has
elected to discontinue its film production and distribution
operations. As of December 31, 2009 and 2008, the
Companys discontinued operations had cash of approximately
$120,000 and $107,000, respectively. As of December 31,
2008, the Companys discontinued operations had accounts
receivable of approximately $10,000. As of December 31,
2009 and 2008, the Companys discontinued operations had
accrued liabilities of approximately $32,000. The income and
expense from the ongoing marketing and distribution of the
current film assets is accounted for as discontinued operations.
Income Taxes The Company recognizes deferred
tax assets and liabilities for future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences
F-10
are expected to be recovered or settled. The effect of deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. In the event the Company determines that the deferred tax
assets will not be realized in the future, the valuation
adjustment to the deferred tax assets is charged to earnings in
the period in which the Company makes such a determination.
The Company uses a two-step process to evaluate a tax position.
The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon
examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The
second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of
benefit to be recognized in the financial statements. A tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement.
Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized
in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the
first subsequent financial reporting period in which the
threshold is no longer met. The Company reports tax-related
interest and penalties as a component of income tax expense.
Based on all known facts and circumstances and current tax law,
the Company believes that the total amount of unrecognized tax
benefits as of December 31, 2009, is not material to its
results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax
benefits as of December 31, 2009, if recognized, would not
have a material effect on its effective tax rate. The Company
further believes that there are no tax positions for which it is
reasonably possible, based on current tax law and policy that
the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or
in the aggregate, a material effect on the Companys
results of operations, financial condition or cash flows.
Earnings (loss) per share Basic earnings
(loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the
period. Diluted earnings (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 earnings (loss) per share are excluded from the
calculation.
Concentration of credit risk The Company
maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to
any significant risk. The amount of cash deposits as of
December 31, 2009 and 2008 in excess of FDIC limits is
approximately $423,000 and $12,919,000, respectively.
Fair value of financial instruments The
recorded amounts of cash and cash equivalents, other
receivables, and accrued liabilities approximate fair value
because of the short-term maturity of these items. The Company
calculates the fair value of its borrowings based on estimated
market rates. Fair value estimates are based on relevant market
information and information about the individual borrowings.
These estimates are subjective in nature, involve matters of
judgment and therefore, cannot be determined with precision.
Estimated fair values are significantly affected by the
assumptions used. Based on the Companys calculations at
December 31, 2009 and 2008, the carrying amount of the
Companys borrowings approximates fair value.
Stock options The Company accounts for its
stock option grants using the modified prospective method. Under
the modified prospective method, stock-based compensation cost
is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over
the requisite service period, which is the vesting period.
Subsequent events The Company has evaluated
subsequent events through the date the consolidated financial
statements were issued on March 31, 2010 and subsequently
reissued on December 30, 2010. See Note 5
Discontinued Operations
Reclassifications Certain amounts presented
in prior years have been reclassified to conform to the current
years presentation, including the reclassification of
deferred compensation expense associated with
F-11
unvested stock grants from other assets to the current year
presentation in which it is netted against additional paid-in
capital.
Recently
Adopted and Recently Issued Accounting Guidance
Adopted
Guidance
On September 30, 2009, the Company adopted changes issued
by the Financial Accounting Standards Board (FASB)
to the authoritative hierarchy of GAAP. These changes establish
the FASB Accounting Standards Codification TM
(Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive
releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The FASB
will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates.
Accounting Standards Updates will not be authoritative in their
own right as they will only serve to update the Codification.
These changes and the Codification itself do not change GAAP
other than the manner in which new accounting guidance is
referenced, and the adoption of these changes had no material
impact on the Companys consolidated financial statements.
Fair Value Accounting On June 30, 2009,
the Company adopted changes issued by the FASB to fair value
disclosures of financial instruments. These changes require a
publicly traded company to include disclosures about the fair
value of its financial instruments whenever it issues summarized
financial information for interim reporting periods. Such
disclosures include the fair value of all financial instruments,
for which it is practicable to estimate that value, whether
recognized or not recognized in the statement of financial
position; the related carrying amount of these financial
instruments; and the method(s) and significant assumptions used
to estimate the fair value. Other than the required disclosures,
the adoption of these changes had no material impact on the
Companys consolidated financial statements.
On June 30, 2009, the Company adopted changes issued by the
FASB to fair value accounting. These changes provide additional
guidance for estimating fair value when the volume and level of
activity for an asset or liability have significantly decreased
and includes guidance for identifying circumstances that
indicate a transaction is not orderly. This guidance is
necessary to maintain the overall objective of fair value
measurements. Fair value is the price that would be received
pursuant to the sale of an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date under current market conditions. The adoption
of these changes had no impact on the Companys
consolidated financial statements.
On June 30, 2009, the Company adopted changes issued by the
FASB to the recognition and presentation of
other-than-temporary
impairments. These changes amend existing
other-than-temporary
impairment guidance for debt securities to make the guidance
more operational and to improve the presentation and disclosure
of
other-than-temporary
impairments on debt and equity securities. The adoption of these
changes had no impact on the Companys consolidated
financial statements.
On January 1, 2009, the Company adopted changes issued by
the FASB to fair value accounting and reporting as it relates to
nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the Companys
consolidated financial statements on at least an annual basis.
These changes define fair value, establish a framework for
measuring fair value in GAAP, and expand disclosures about fair
value measurements. This guidance applies to other GAAP that
require or permit fair value measurements and is to be applied
prospectively with limited exceptions. The adoption of these
changes, as it relates to nonfinancial assets and nonfinancial
liabilities, had no impact on the Companys consolidated
financial statements. These provisions will be applied at such
time a fair value measurement of a nonfinancial asset or
nonfinancial liability is required, which may result in a fair
value that is materially different than would have been
calculated prior to the adoption of these changes.
Business Combinations and Consolidation
Accounting On January 1, 2009, the Company
adopted changes issued by the FASB to consolidation accounting
and reporting. These changes establish accounting
F-12
and reporting for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. This guidance
defines a noncontrolling interest, previously called a minority
interest, as the portion of equity in a subsidiary not
attributable, directly or indirectly, to a parent. These changes
require, among other items, that a noncontrolling interest be
included in the consolidated statement of financial position
within equity separate from the parents equity;
consolidated net income to be reported at amounts inclusive of
both the parents and noncontrolling interests shares
and, separately, the amounts of consolidated net income
attributable to the parent and noncontrolling interest all on
the consolidated statement of operations; and if a subsidiary is
deconsolidated, any retained noncontrolling equity investment in
the former subsidiary be measured at fair value and a gain or
loss be recognized in net income based on such fair value. Other
than the change in presentation of noncontrolling interests, the
adoption of these changes had no impact on the Companys
consolidated financial statements. The presentation and
disclosure requirements of these changes were applied
retrospectively.
On January 1, 2009, the Company adopted changes issued by
the FASB to accounting for business combinations. While
retaining the fundamental requirements of accounting for
business combinations, including that the purchase method be
used for all business combinations and for an acquirer to be
identified for each business combination, these changes define
the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the
acquisition date as the date that the acquirer achieves control
instead of the date that the consideration is transferred. These
changes require an acquirer in a business combination, including
business combinations achieved in stages (step acquisition), to
recognize the assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited
exceptions. This guidance also requires the recognition of
assets acquired and liabilities assumed arising from certain
contractual contingencies as of the acquisition date, measured
at their acquisition-date fair values. Additionally, these
changes require acquisition-related costs to be expensed in the
period in which the costs are incurred and the services are
received instead of including such costs as part of the
acquisition price. The adoption of these changes had no impact
on the Companys consolidated financial statements. Also,
this guidance was applied to the acquisitions the Company
completed in the 3rd quarter of 2009.
Other On June 30, 2009, the Company
adopted changes issued by the FASB to accounting for and
disclosure of events that occur after the balance sheet date but
before the Companys consolidated financial statements are
issued or are available to be issued, otherwise known as
subsequent events. Specifically, these changes set
forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or
disclosure in the Companys consolidated financial
statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in the Companys consolidated financial
statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. The adoption of these changes had no impact on the
Companys consolidated financial statements as management
already followed a similar approach prior to the adoption of
this new guidance.
On January 1, 2009, the Company adopted changes issued by
the FASB to disclosures about derivative instruments and hedging
activities. These changes require enhanced disclosures about an
entitys derivative and hedging activities, including
(i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items
are accounted for, and (iii) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. The adoption of these
changes had no impact on the Companys consolidated
financial statements.
On January 1, 2009, the Company adopted changes issued by
the FASB to accounting for intangible assets. These changes
amend the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset in order to improve the
consistency between the useful life of a recognized intangible
asset outside of a business combination and the period of
expected cash flows used to measure the fair value of an
intangible asset in a business combination. The adoption of
these changes had no impact on the Companys consolidated
financial statements.
F-13
On January 1, 2009, the Company adopted changes issued by
the FASB to the calculation of earnings per share. These changes
state that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method for all periods presented. The adoption of
these changes had no impact on the Companys consolidated
financial statements.
In August 2009, the FASB issued changes to fair value accounting
for liabilities. These changes clarify existing guidance that in
circumstances in which a quoted price in an active market for
the identical liability is not available, an entity is required
to measure fair value using either a valuation technique that
uses a quoted price of either a similar liability or a quoted
price of an identical or similar liability when traded as an
asset, or another valuation technique that is consistent with
the principles of fair value measurements, including an income
approach (e.g., present value technique). This guidance
also states that both a quoted price in an active market for the
identical liability and a quoted price for the identical
liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. These changes became
effective for the Company on October 1, 2009. Management
has determined that the adoption of these changes did not have
an impact on the Companys consolidated financial
statements.
Issued
Guidance
In June 2009, the FASB issued changes to the accounting for
variable interest entities. These changes require an enterprise
to perform an analysis to determine whether the
enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity; to
require ongoing reassessments of whether an enterprise is the
primary beneficiary of a variable interest entity; to eliminate
the quantitative approach previously required for determining
the primary beneficiary of a variable interest entity; to add an
additional reconsideration event for determining whether an
entity is a variable interest entity when any changes in facts
and circumstances occur such that holders of the equity
investment at risk, as a group, lose the power from voting
rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the
entitys economic performance; and to require enhanced
disclosures that will provide users of the Companys
financial statements with more transparent information about an
enterprises involvement in a variable interest entity.
These changes become effective for the Company on
January 1, 2010. Management is currently evaluating the
potential impact of these changes on the Companys
consolidated financial statements.
In June 2009, the FASB issued changes to the accounting for
transfers of financial assets. These changes, among other
things, remove the concept of a qualifying special-purpose
entity and remove the exception from the application of variable
interest accounting to variable interest entities that are
qualifying special-purpose entities; limits the circumstances in
which a transferor derecognizes a portion or component of a
financial asset; defines a participating interest; requires a
transferor to recognize and initially measure at fair value all
assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and requires enhanced
disclosure. These changes become effective for the Company on
January 1, 2010. Management has determined that the
adoption of these changes will not have an impact on the
Companys consolidated financial statements.
|
|
Note 3
|
Change in
Accounting Estimate
|
During the second quarter of 2009, the Company completed its
quarterly analysis of the allowance for doubtful accounts based
on historical collection trends for the Companys SDC
operating segment using newly available information related to
the correlation of the ultimate collectability of an account and
the aging of that account. The effect of this change in estimate
for doubtful accounts was to increase the allowance for doubtful
accounts that is netted against accounts receivable and increase
operating expenses by $2,648,207. This change in accounting
estimate also increased net loss per basic and diluted share by
$0.09 for the year ended December 31, 2009.
F-14
During 2009 and 2008, the Companys SMS operating segment
made the following acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Acquisition
|
|
Business
|
|
Purchase
|
|
|
Financed by
|
|
Date
|
|
Acquired
|
|
Price
|
|
|
Seller
|
|
|
September 2009
|
|
Avastra Eastern Sleep Centers, Inc. (Eastern)
|
|
$
|
4,700,000
|
|
|
$
|
|
|
August 2009
|
|
somniTech, Inc. and somniCare, Inc. (Somni)
|
|
|
5,900,000
|
|
|
|
|
|
June 2008
|
|
Sleep Center of Waco, Ltd.,
Plano Sleep Center, Ltd. and
Southlake Sleep Center, Ltd. (Texas Labs)
|
|
|
960,000
|
|
|
|
|
|
June 2008
|
|
Nocturna Sleep Center, LLC (Nocturna)
|
|
|
2,172,790
|
|
|
|
726,190
|
|
April 2008
|
|
Roll-up of
noncontrolling interests in
certain SMS sleep centers (Minority)
|
|
|
1,616,356
|
|
|
|
|
|
The Company believes that the Somni and Eastern acquisitions
solidify the Company as a national leader in quality sleep
medicine. In addition, the Company expects to experience
operational benefits from the Somni and Eastern acquisitions,
including economies of scale and reduced overall overhead
expenses.
The acquisitions of Somni and Eastern included the acquisition
of 100% of the outstanding common stock in Somni and Eastern and
have been accounted for as business combinations under the
acquisition method. Management has commenced the appraisals
necessary to assess the fair values of the tangible and
intangible assets and liabilities assumed, and the amount of
goodwill recognized as of the acquisition dates. As the values
of certain assets and liabilities are preliminary in nature,
they are subject to adjustment as additional information is
obtained about the facts and circumstances that existed as of
the acquisition date. The valuations will be finalized within
12 months of the close of the acquisition. When the
valuations are finalized, any changes to the preliminary
valuation of assets acquired and liabilities assumed may result
in significant adjustments to the fair value of the net
identifiable assets acquired and goodwill. The goodwill related
to Somni and Eastern is not expected to be deductible for tax
purposes.
At the time of the acquisitions, the fair values of the assets
acquired and liabilities assumed were preliminarily determined
to be the net book values previously recorded by Somni and
Eastern. As of December 31, 2009, management has completed
a preliminary internal valuation of the fair values of the
assets acquired and liabilities assumed. Management expects that
the final appraisals of Somni and Eastern could result in
changes, however it is not anticipated that the final appraisal
amounts will be materially different from those reflected at
December 31, 2009.
The results of operations from the businesses acquired have been
included in the Companys consolidated statement of
operations prospectively from the date of acquisition. Purchase
accounting was used to account for the 2008 acquisitions. Below
is the purchase price allocation used to record each of these
purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
|
|
Texas
|
|
|
|
|
|
|
Somni
|
|
|
Eastern
|
|
|
Minority
|
|
|
Labs
|
|
|
Nocturna
|
|
|
Cash and cash equivalents
|
|
$
|
225,774
|
|
|
$
|
33,389
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accounts receivable
|
|
|
1,002,334
|
|
|
|
455,120
|
|
|
|
|
|
|
|
481,187
|
|
|
|
210,664
|
|
Inventories
|
|
|
78,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
36,299
|
|
|
|
6,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,342,765
|
|
|
|
494,816
|
|
|
|
|
|
|
|
481,187
|
|
|
|
210,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,060,362
|
|
|
|
157,109
|
|
|
|
|
|
|
|
1,707,978
|
|
|
|
289,651
|
|
Intangible assets
|
|
|
1,455,000
|
|
|
|
3,991,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Goodwill
|
|
|
3,747,379
|
|
|
|
163,730
|
|
|
|
998,712
|
|
|
|
881,244
|
|
|
|
1,522,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
7,605,506
|
|
|
|
4,806,655
|
|
|
|
998,712
|
|
|
|
3,070,409
|
|
|
|
2,172,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
|
|
Texas
|
|
|
|
|
|
|
Somni
|
|
|
Eastern
|
|
|
Minority
|
|
|
Labs
|
|
|
Nocturna
|
|
|
Noncontrolling interest in net tangible assets
|
|
|
|
|
|
|
|
|
|
|
617,644
|
|
|
|
|
|
|
|
|
|
Less:Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
548,197
|
|
|
|
39,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
501,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
655,642
|
|
|
|
67,158
|
|
|
|
|
|
|
|
2,110,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,705,506
|
|
|
|
106,655
|
|
|
|
|
|
|
|
2,110,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
5,900,000
|
|
|
|
4,700,000
|
|
|
|
1,616,356
|
|
|
|
960,000
|
|
|
|
2,172,790
|
|
Less seller financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(726,190
|
)
|
Less common stock issued
|
|
|
|
|
|
|
(1,544,000
|
)
|
|
|
(1,616,356
|
)
|
|
|
(960,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for business
|
|
$
|
5,900,000
|
|
|
$
|
3,156,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,446,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables provide a rollforward of the preliminary
estimated fair values of the assets acquired and liabilities
assumed at the date of the Somni and Eastern acquisitions to the
adjusted preliminary amounts as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary
|
|
|
Purchase
|
|
|
Current
|
|
|
|
Amount
|
|
|
Accounting
|
|
|
Preliminary
|
|
|
|
Recorded
|
|
|
Adjustments
|
|
|
Allocation
|
|
|
Somni
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
225,774
|
|
|
$
|
|
|
|
$
|
225,774
|
|
Accounts receivable
|
|
|
1,176,233
|
|
|
|
(173,899
|
)
|
|
|
1,002,334
|
|
Inventories
|
|
|
78,358
|
|
|
|
|
|
|
|
78,358
|
|
Other current assets
|
|
|
6,268
|
|
|
|
30,031
|
|
|
|
36,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,486,633
|
|
|
|
(143,868
|
)
|
|
|
1,342,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,060,362
|
|
|
|
|
|
|
|
1,060,362
|
|
Intangible assets
|
|
|
|
|
|
|
1,455,000
|
|
|
|
1,455,000
|
|
Goodwill
|
|
|
4,930,761
|
|
|
|
(1,183,382
|
)
|
|
|
3,747,379
|
|
Other assets
|
|
|
27,711
|
|
|
|
(27,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
7,505,467
|
|
|
|
100,039
|
|
|
|
7,605,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
448,158
|
|
|
|
100,039
|
|
|
|
548,197
|
|
Short-term debt
|
|
|
501,667
|
|
|
|
|
|
|
|
501,667
|
|
Long-term debt
|
|
|
655,642
|
|
|
|
|
|
|
|
655,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,605,467
|
|
|
|
100,039
|
|
|
|
1,705,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
5,900,000
|
|
|
$
|
|
|
|
$
|
5,900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,389
|
|
|
$
|
|
|
|
$
|
33,389
|
|
Accounts receivable
|
|
|
805,120
|
|
|
|
(350,000
|
)
|
|
|
455,120
|
|
Other current assets
|
|
|
167,087
|
|
|
|
(160,780
|
)
|
|
|
6,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,005,596
|
|
|
|
(510,780
|
)
|
|
|
494,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary
|
|
|
Purchase
|
|
|
Current
|
|
|
|
Amount
|
|
|
Accounting
|
|
|
Preliminary
|
|
|
|
Recorded
|
|
|
Adjustments
|
|
|
Allocation
|
|
|
Property and equipment
|
|
|
157,109
|
|
|
|
|
|
|
|
157,109
|
|
Intangible assets
|
|
|
|
|
|
|
3,991,000
|
|
|
|
3,991,000
|
|
Goodwill
|
|
|
3,657,557
|
|
|
|
(3,493,827
|
)
|
|
|
163,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
4,820,262
|
|
|
|
(13,607
|
)
|
|
|
4,806,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
53,104
|
|
|
|
(13,607
|
)
|
|
|
39,497
|
|
Long-term debt
|
|
|
67,158
|
|
|
|
|
|
|
|
67,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
120,262
|
|
|
|
(13,607
|
)
|
|
|
106,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
4,700,000
|
|
|
$
|
|
|
|
$
|
4,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The purchase price adjustments related primarily to the
preliminary internal valuation of intangible assets and
continued evaluation of accounts receivable and accrued
liabilities.
During 2008, the Companys ApothecaryRx (discontinued
operations) operating segment made the following acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Acquisition
|
|
Business
|
|
Purchase
|
|
|
Financed by
|
|
Date
|
|
Acquired
|
|
Price
|
|
|
Seller
|
|
|
January 2008
|
|
Rambo Pharmacy (Rambo)
|
|
$
|
2,558,564
|
|
|
$
|
1,020,215
|
|
February 2008
|
|
Thrifty White Store 726 (Thrifty)
|
|
|
824,910
|
|
|
|
99,444
|
|
March 2008
|
|
Newts Pharmacy (Newts)
|
|
|
1,381,066
|
|
|
|
486,209
|
|
March 2008
|
|
Professional Pharmacy (Professional)
|
|
|
942,809
|
|
|
|
263,100
|
|
June 2008
|
|
Parkway Drug (Parkway)
|
|
|
7,360,998
|
|
|
|
1,489,814
|
|
November 2008
|
|
Hardamon Drug (Hardamon)
|
|
|
253,362
|
|
|
|
44,821
|
|
The results of operations from the businesses acquired have been
included in the Companys consolidated statement of
operations prospectively from the date of acquisition. Purchase
accounting was used to account for all of these 2008
acquisitions. Below is the purchase price allocation used to
record each of these purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Rambo
|
|
|
Thrifty
|
|
|
Newts
|
|
|
Professional
|
|
|
Parkway
|
|
|
Hardamon
|
|
|
Cash
|
|
$
|
1,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,000
|
|
|
$
|
|
|
Accounts receivable
|
|
|
7,027
|
|
|
|
|
|
|
|
3,626
|
|
|
|
1,412
|
|
|
|
13,706
|
|
|
|
|
|
Inventory
|
|
|
350,537
|
|
|
|
161,950
|
|
|
|
395,546
|
|
|
|
398,982
|
|
|
|
2,346,569
|
|
|
|
103,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
358,564
|
|
|
|
161,950
|
|
|
|
399,172
|
|
|
|
400,394
|
|
|
|
2,362,275
|
|
|
|
103,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
33,683
|
|
|
|
|
|
|
|
7,500
|
|
|
|
5,000
|
|
|
|
113,812
|
|
|
|
|
|
Intangible assets
|
|
|
973,990
|
|
|
|
662,960
|
|
|
|
462,209
|
|
|
|
162,415
|
|
|
|
1,062,636
|
|
|
|
149,402
|
|
Goodwill
|
|
|
1,192,327
|
|
|
|
|
|
|
|
512,185
|
|
|
|
375,000
|
|
|
|
3,822,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
2,558,564
|
|
|
|
824,910
|
|
|
|
1,381,066
|
|
|
|
942,809
|
|
|
|
7,360,998
|
|
|
|
253,362
|
|
Less seller financing
|
|
|
(1,020,215
|
)
|
|
|
(99,444
|
)
|
|
|
(486,209
|
)
|
|
|
(263,100
|
)
|
|
|
(1,489,814
|
)
|
|
|
(44,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for business
|
|
$
|
1,538,349
|
|
|
$
|
725,466
|
|
|
$
|
894,857
|
|
|
$
|
679,709
|
|
|
$
|
5,871,184
|
|
|
$
|
208,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, the Company recorded expenses of $497,000 related
to costs incurred in the acquisition of Somni and Eastern. The
acquisition costs were primarily related to legal and
professional fees and other costs incurred in performing due
diligence.
F-17
The amounts of Somnis and Easterns revenues and
earnings included in the Companys consolidated statements
of operations for the year ended December 31, 2009, and the
revenue and earnings of the combined entity had the acquisition
dates for all 2009 and 2008 acquisitions been January 1,
2009, or January 1, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Actual:
|
|
|
|
|
|
|
|
|
Somni from 8/24/2009 to 12/31/2009
|
|
$
|
3,328,000
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Eastern from 9/14/2009 to 12/31/2009
|
|
$
|
690,000
|
|
|
$
|
260,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental Pro Forma:
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
115,678,000
|
|
|
$
|
(3,896,000
|
)
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
119,433,000
|
|
|
$
|
3,727,000
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share (basic and diluted)
from net income (loss) attributable to Graymark
|
|
|
|
|
|
|
|
|
Healthcare, Inc.:
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
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. Net income (loss) per
share was calculated assuming the common stock issued in the
Eastern acquisition was retroactively issued on January 1,
2009, or January 1, 2008.
|
|
Note 5
|
Discontinued
Operations
|
On September 1, 2010, the Company executed an Asset
Purchase Agreement, which was subsequently amended on
October 29, 2010, (as amended, the Agreement)
providing for the sale of substantially all of the assets of the
Companys subsidiary, ApothecaryRx (the ApothecaryRx
Sale). ApothecaryRx operates 18 retail pharmacy stores
selling prescription drugs and a small assortment of general
merchandise, including diabetic merchandise, non-prescription
drugs, beauty products and cosmetics, seasonal merchandise,
greeting cards and convenience foods. The closing of the sale of
ApothecaryRx occurred in December 2010. As a result of the sale
of ApothecaryRx, the related assets, liabilities, results of
operations and cash flows of ApothecaryRx have been classified
as discontinued operations in the accompanying financial
statements.
Under the Agreement, the consideration for the ApothecaryRx
assets being purchased and liabilities being assumed is
$25,500,000 plus up to $7,000,000 for inventory (Inventory
Amount), but less any payments remaining under goodwill
protection agreements and any amounts due under promissory which
are assumed by buyer (the Purchase Price). For
purposes of determining the Inventory Amount, the parties agreed
to hire an independent valuator to perform a review and
valuation of inventory being purchased from each pharmacy
location; the independent valuator valued the Inventory Amount
at approximately $3.8 million. Of the Purchase Price,
$2,000,000 will be deposited in an escrow fund (the
Indemnity Escrow Fund) pursuant to the terms of an
indemnity escrow agreement. The amount of the Purchase Price may
be adjusted downward if leases to certain pharmacy locations
cannot be assigned to the buyer. All proceeds from the sale of
ApothecaryRx were deposited in a restricted account at Arvest
Bank. Of the proceeds, $22,000,000 was used to reduce
outstanding obligations under the Companys credit facility
with Arvest Bank. The Company is required to pay Arvest Bank an
additional $3,000,000 by January 6, 2011.
Generally, on the
12-month
anniversary of the final closing date of the sale of
ApothecaryRx, 50% of the remaining funds held in the Indemnity
Escrow Fund will be released, subject to deduction for any
pending claims for indemnification. All remaining funds held in
the Indemnity Escrow Fund, if any, will be released on
F-18
the 18-month
anniversary of the final closing date of the sale, subject to
any pending claims for indemnification. Of the $2,000,000
Indemnity Escrow Fund, $1,000,000 is subject to partial or full
recovery by the buyer if the average daily prescription sales at
the buyers location in Sterling, Colorado over a six-month
period after the buyer purchases the ApothecaryRx location in
Sterling, Colorado does not increase by a certain percentage of
the average daily prescription sales by the ApothecaryRx
Sterling, Colorado location (the Retention Rate
Earnout). In addition, if an agreement, on certain terms
required by the buyer, relating to the sale of the long-term
care pharmacy business at the ApothecaryRx Sterling, Colorado
pharmacy is not completed prior to the closing of the sale of
that location to the buyer, an additional $1,500,000 will be
deposited in an escrow fund (the LTC Escrow Fund)
and is subject to deduction to the extent that certain of
ApothecaryRxs former employees and their affiliates
compete in the retail pharmacy business within the
18-month
anniversary of the closing of the sale of that location to the
buyer.
The operating results of ApothecaryRx classified as discontinued
operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
89,669,301
|
|
|
$
|
81,329,158
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
1,992,005
|
|
|
$
|
881,691
|
|
Income tax (provision)
|
|
|
|
|
|
|
(136,000
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
1,992,005
|
|
|
$
|
745,691
|
|
|
|
|
|
|
|
|
|
|
The balance sheet items for ApothecaryRx classified as
discontinued operations as of December 31, 2009 and 2008
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash and cash equivalents
|
|
$
|
796,961
|
|
|
$
|
1,651,776
|
|
Accounts receivable, net of allowances
|
|
|
7,421,407
|
|
|
|
7,564,963
|
|
Inventories
|
|
|
7,882,717
|
|
|
|
8,699,154
|
|
Other current assets
|
|
|
210,943
|
|
|
|
90,700
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,312,028
|
|
|
|
18,006,593
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
992,481
|
|
|
|
1,000,238
|
|
Intangible assets, net
|
|
|
7,005,704
|
|
|
|
7,848,960
|
|
Goodwill
|
|
|
13,089,138
|
|
|
|
13,089,138
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
21,087,323
|
|
|
|
21,938,336
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
37,399,351
|
|
|
$
|
39,944,929
|
|
|
|
|
|
|
|
|
|
|
Payables and accrued liabilities
|
|
$
|
6,107,109
|
|
|
$
|
9,336,615
|
|
Current portion of long-term debt
|
|
|
1,783,298
|
|
|
|
3,336,913
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,890,407
|
|
|
|
12,673,528
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
23,694,319
|
|
|
|
25,736,326
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
31,584,726
|
|
|
$
|
38,409,854
|
|
|
|
|
|
|
|
|
|
|
F-19
|
|
Note 6
|
Property
and Equipment
|
Following are the components of property and equipment included
in the accompanying consolidated balance sheets as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Equipment
|
|
$
|
4,849,083
|
|
|
$
|
4,138,567
|
|
Furniture and fixtures
|
|
|
1,066,362
|
|
|
|
590,079
|
|
Software
|
|
|
530,433
|
|
|
|
101,446
|
|
Vehicles
|
|
|
288,646
|
|
|
|
233,452
|
|
Leasehold improvements
|
|
|
1,701,927
|
|
|
|
1,023,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,436,451
|
|
|
|
6,087,211
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(2,125,290
|
)
|
|
|
(1,073,035
|
)
|
Less: Discontinued operations
|
|
|
992,481
|
|
|
|
1,000,238
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,318,680
|
|
|
$
|
4,013,938
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2009
and 2008 was $952,432 and $561,873, respectively. Depreciation
expense for the years ended December 31, 2009 and 2008,
included in discontinued operations, was $271,093 and $172,719,
respectively.
|
|
Note 7
|
Goodwill
and Other Intangibles
|
Changes in the carrying amount of goodwill by operating segment
during the years ended December 31, 2009 and 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ApothecaryRx
|
|
|
|
|
|
|
|
|
|
(Discontinued
|
|
|
|
|
|
|
SMS
|
|
|
Operations)
|
|
|
Total
|
|
|
December 31, 2007
|
|
$
|
13,203,354
|
|
|
$
|
7,044,551
|
|
|
$
|
20,247,905
|
|
Business acquisitions
|
|
|
2,403,719
|
|
|
|
5,901,787
|
|
|
|
8,305,506
|
|
Contingent purchase payment
|
|
|
|
|
|
|
142,800
|
|
|
|
142,800
|
|
Purchase of minority interests
|
|
|
998,712
|
|
|
|
|
|
|
|
998,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
16,605,785
|
|
|
|
13,089,138
|
|
|
|
29,694,923
|
|
Business acquisitions
|
|
|
3,911,109
|
|
|
|
|
|
|
|
3,911,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
20,516,894
|
|
|
$
|
13,089,138
|
|
|
$
|
33,606,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had $33.6 million
of goodwill resulting from business acquisitions. Goodwill and
intangibles 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 units 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 units goodwill with the
carrying value of that goodwill.
The Companys evaluation of goodwill completed during 2009
and 2008 resulted in no impairment losses.
F-20
Intangible assets as of December 31, 2009 and 2008 include
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
2009
|
|
|
2008
|
|
|
|
Life
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
SMS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
Indefinite
|
|
$
|
3,870,000
|
|
|
$
|
|
|
|
$
|
3,870,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Customer relationships
|
|
8 - 15
|
|
|
1,450,000
|
|
|
|
(111,031
|
)
|
|
|
1,338,969
|
|
|
|
480,000
|
|
|
|
(61,334
|
)
|
|
|
418,666
|
|
Covenants not to compete
|
|
3 - 15
|
|
|
295,000
|
|
|
|
(76,525
|
)
|
|
|
218,475
|
|
|
|
100,000
|
|
|
|
(19,444
|
)
|
|
|
80,556
|
|
Trademark
|
|
10 - 15
|
|
|
271,000
|
|
|
|
(12,644
|
)
|
|
|
258,356
|
|
|
|
50,000
|
|
|
|
(1,944
|
)
|
|
|
48,056
|
|
Payor contracts
|
|
15
|
|
|
190,000
|
|
|
|
(4,222
|
)
|
|
|
185,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ApothecaryRx (Discontinued Operations):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer files
|
|
5 - 15
|
|
|
7,587,717
|
|
|
|
(1,246,879
|
)
|
|
|
6,340,838
|
|
|
|
7,587,717
|
|
|
|
(724,762
|
)
|
|
|
6,862,955
|
|
Covenants not to compete
|
|
3 - 5
|
|
|
1,514,065
|
|
|
|
(849,199
|
)
|
|
|
664,866
|
|
|
|
1,514,065
|
|
|
|
(528,060
|
)
|
|
|
986,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,177,782
|
|
|
|
(2,300,500
|
)
|
|
|
12,877,282
|
|
|
|
9,731,782
|
|
|
|
(1,335,544
|
)
|
|
|
8,396,238
|
|
Less: Discontinued operations
|
|
|
|
|
9,101,782
|
|
|
|
(2,096,078
|
)
|
|
|
7,005,704
|
|
|
|
9,101,782
|
|
|
|
(1,252,822
|
)
|
|
|
7,848,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
6,076,000
|
|
|
$
|
(204,422
|
)
|
|
$
|
5,871,578
|
|
|
$
|
630,000
|
|
|
$
|
(82,722
|
)
|
|
$
|
547,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of the acquisition of Eastern, the Company acquired a
management service agreement (MSA) which provides
for certain rights to the earnings of Eastern for an initial ten
year period. The MSA also has renewal options at the end of the
initial term. The MSA is essentially a contract from which the
Company expects to earn cash flow for the foreseeable future.
Given that Eastern is a going concern, the Company considers the
MSA to have an indefinite life. As of December 31, 2009,
the MSA had a recorded value of $3,870,000.
Amortization expense for the years ended December 31, 2009
and 2008 was $121,970 and $36,754, respectively. Amortization
expense for the years ended December 31, 2009 and 2008,
included in discontinued operations, was $842,985 and $799,946,
respectively. Amortization expense for the next five years
related to theses intangible assets is expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
ApothecaryRx
|
|
|
|
|
|
|
|
(Discontinued
|
|
|
|
|
|
SMS
|
|
Operations)
|
|
Total
|
|
|
2010
|
|
$227,767
|
|
$760,481
|
|
$
|
988,248
|
|
2011
|
|
208,322
|
|
769,981
|
|
|
978,303
|
|
2012
|
|
186,211
|
|
673,523
|
|
|
859,734
|
|
2013
|
|
169,767
|
|
536,563
|
|
|
706,330
|
|
2014
|
|
169,767
|
|
498,876
|
|
|
668,643
|
|
In December 2008, the Company invested in a non-controlled
entity (the Fund) whose purpose is to invest in
Oklahoma based small or rural small business ventures. Such
investment generates tax credits which will be allocated to
investors and can be used to offset Oklahoma state income tax.
The tax credits are available through a rural economic
development fund established by the state of Oklahoma.
The Company invested $200,000 and signed a non-recourse debt
agreement for approximately $1,537,000. The debt agreement is
completely non-recourse to the Company for any amount in excess
of the pledged capital investment of $200,000. As the debt
agreement is non-recourse and has been guaranteed by other
parties, it has not been reflected in the accompanying
consolidated balance sheet.
In January 2009, the Company was provided with documentation
from the Fund referencing tax credits which are immediately
available to the Company in the amount of approximately
$400,000. The tax credits expire in 2011.
F-21
The Companys borrowings by operating segment as of
December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
Rate(1)
|
|
Date
|
|
|
2009
|
|
|
2008
|
|
|
SMS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
5%
|
|
|
May 2014
|
|
|
$
|
12,596,375
|
|
|
$
|
12,596,375
|
|
Bank line of credit
|
|
5%
|
|
|
June 2014 -
|
|
|
|
9,002,341
|
|
|
|
4,082,169
|
|
|
|
|
|
|
Aug. 2015
|
|
|
|
|
|
|
|
|
|
Sleep center working capital notes payable
|
|
3.25 - 8.75%
|
|
|
Jan. 2010 -
|
|
|
|
467,835
|
|
|
|
716,074
|
|
|
|
|
|
|
July 2012
|
|
|
|
|
|
|
|
|
|
Seller financing, matured
|
|
|
|
|
|
|
|
|
|
|
|
|
490,078
|
|
Notes payable on equipment
|
|
6 - 14%
|
|
|
Apr. 2012 -
|
|
|
|
570,947
|
|
|
|
399,686
|
|
|
|
|
|
|
Dec. 2013
|
|
|
|
|
|
|
|
|
|
|
|
2.9 -
|
|
|
Nov. 2012 -
|
|
|
|
104,764
|
|
|
|
133,511
|
|
Notes payable on vehicles
|
|
3.9%
|
|
|
Dec. 2013
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
11.4%
|
|
|
Nov. 2010
|
|
|
|
81,314
|
|
|
|
160,480
|
|
Short-term insurance premium financing
|
|
7.5%
|
|
|
Sept. 2010
|
|
|
|
68,316
|
|
|
|
|
|
Short-term equipment leases
|
|
|
|
|
|
|
|
|
|
|
|
|
75,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,891,892
|
|
|
|
18,653,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ApothecaryRx (Discontinued Operations):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
5%
|
|
|
May 2014
|
|
|
|
17,403,625
|
|
|
|
17,403,625
|
|
Bank line of credit
|
|
5%
|
|
|
July 2014 -
|
|
|
|
5,394,594
|
|
|
|
5,394,894
|
|
|
|
|
|
|
Dec. 2014
|
|
|
|
|
|
|
|
|
|
Seller financing
|
|
4.31 -
|
|
|
Jan. 2010 -
|
|
|
|
2,015,495
|
|
|
|
5,164,611
|
|
|
|
7.625%
|
|
|
June 2011
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
0.0 -
|
|
|
Jan. 2012 -
|
|
|
|
663,903
|
|
|
|
1,110,109
|
|
|
|
7.625%
|
|
|
Nov. 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,477,617
|
|
|
|
29,073,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
|
|
|
|
|
|
48,369,509
|
|
|
|
47,726,724
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings discontinued operations
|
|
|
|
|
|
|
|
|
(25,477,617
|
)
|
|
|
(29,073,239
|
)
|
Short-term debt
|
|
|
|
|
|
|
|
|
(195,816
|
)
|
|
|
(565,190
|
)
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
(480,201
|
)
|
|
|
(576,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
$
|
22,215,875
|
|
|
$
|
17,511,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Effective rate as of December 31, 2009 |
In May 2008 and as amended in May 2009, the Company entered into
a loan agreement with Arvest Bank consisting of a
$30 million term loan (the Term Loan) and a
$15 million line of credit to be used for future
acquisitions (the Acquisition Line); collectively
referred to as the Credit Facility. The Term Loan
was used by the Company to consolidate certain prior loans to
the Companys subsidiaries SDC Holdings and ApothecaryRx.
The Term Loan and the Acquisition Line bear interest at the
prime rate as reported in the Wall Street Journal or the floor
rate of 5%. The rate on the Term Loan is adjusted annually on
May 21. The rate on the Acquisition Line is adjusted on the
anniversary date of each advance or tranche. The Term Loan
matures on May 21, 2014 and requires quarterly payments of
interest only. Commencing on September 1, 2011, the
F-22
Company is obligated to make quarterly payments of principal and
interest calculated on a seven-year amortization based on the
unpaid principal balance on the Term Loan as of June 1,
2011. Each advance or tranche of the Acquisition Line will
become due on the sixth anniversary of the first day of the
month following the date of the advance or tranche. Each advance
or tranche is repaid in quarterly payments of interest only for
three years and thereafter, quarterly principal and interest
payments based on a seven-year amortization until the balloon
payment on the maturity date of the advance or tranche. The
Credit Facility is collateralized by substantially all of the
Companys assets and is personally guaranteed by various
individual shareholders of the Company. Commencing with the
calendar quarter ending June 30, 2010 and thereafter during
the term of the Credit Facility, based on the latest four
rolling quarters, the Company agreed to maintain a Debt Service
Coverage Ratio of not less than 1.25 to 1.
The Debt Service Coverage Ratio is defined as the ratio of:
|
|
|
|
|
the net income of the Company (i) increased by interest
expense, amortization, depreciation, and non-recurring expenses
as approved by Arvest Bank, and (ii) decreased by the
amount of noncontrolling (minority) interest share of net income
and distributions to noncontrolling (minority) interests for
taxes, to
|
|
|
|
annual debt service including interest expense and current
maturities of indebtedness as determined in accordance with
generally accepted accounting principles.
|
If the Company were to acquire another company or its business,
the net income of the acquired company and the Companys
debt service associated with acquiring the company may both be
excluded from the Debt Service Coverage Ratio, at the option of
the Company.
As of December 31, 2009 the Companys Debt Service
Coverage Ratio is less than 1.25 to 1. Arvest Bank waived the
Debt Service Coverage Ratio requirement for the quarters ended
June 30, 2010 and September 30, 2010 and, subject to
payment of certain amounts from the proceeds of the ApothecaryRx
Sale, for the quarter ended December 31, 2010. The Company
expects to achieve compliance by March 31, 2011 through a
combination of strategic, operational and debt reduction
strategies, including the ApothecaryRx Sale. If the Company is
unsuccessful in fully executing these strategies, there is no
assurance that Arvest Bank will waive or further delay the
requirement.
As of December 31, 2009, there is $30 million
outstanding on the Term Loan consisting of $12,596,375 to the
Companys SMS operating segment and $17,403,625 to the
Companys ApothecaryRx operating segment. As of
December 31, 2009, there is $14,396,935 outstanding on the
Acquisition Line consisting of $9,002,341 to the Companys
SMS operating segment and $5,394,594 to the Companys
ApothecaryRx operating segment. As of December 31, 2009,
there is approximately $603,000 available under the Acquisition
Line.
SDC Holdings has entered into various notes payable to banks to
supplement the working capital needs of its individual sleep
centers. The amount owed under these notes at December 31,
2009 of $467,835 bears interest at variable rates ranging from
0.0% to 1.5% above the prime rate as published in the Wall
Street Journal except for one note which bears interest at a
fixed rate of 8.75%. The Company is required to make monthly
payments of principal and interest totaling $29,828. The notes
mature on varying dates from January 31, 2010 to
July 5, 2012.
SDC Holdings has entered into various notes payable for the
purchase of sleep diagnostic equipment. The balance owed at
December 31, 2009 of $570,947 is comprised of three notes
with that bear interest at fixed rates ranging from 6% to 14%.
The Company is required to make monthly payments of principal
and interest totaling $14,135. The notes mature on varying dates
from April 2012 to December 2013.
SDC Holdings has entered various notes payable for the purchase
of vehicles. Under the terms of the notes, the Company is
required to make monthly principal and interest payments
totaling $2,732. The notes mature on various dates from
November 17, 2012 to December 22, 2013.
F-23
SDC Holdings has entered various capital leases for the purchase
of equipment. Under the terms of the leases, the Company is
required to make monthly principal and interest payments
totaling $7,248. The leases mature on various dates through
November 23, 2010.
SDC Holdings has entered into a short-term premium financing
arrangement for its employee and officer liability coverage. The
financing arrangement bears interest at 7.5% and matures in
September 2010.
As part of its acquisitions of retail pharmacies, ApothecaryRx
regularly enters into promissory notes with the sellers. These
notes bear interest at fixed rates. In addition, the Company
enters into non-compete agreements with the sellers which
include holding back a portion of the purchase price at fixed
rates of interest. The Company is required to make varying
periodic payments of principal and interest under the seller
financing and non-compete agreements.
At December 31, 2009, future maturities of long-term debt
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ApothecaryRx
|
|
|
|
|
|
|
|
|
|
(Discontinued
|
|
|
|
|
|
|
SMS
|
|
|
Operations)
|
|
|
Total
|
|
|
2010
|
|
$
|
480,201
|
|
|
$
|
1,783,298
|
|
|
$
|
2,263,499
|
|
2011
|
|
|
1,201,866
|
|
|
|
1,882,103
|
|
|
|
3,083,969
|
|
2012
|
|
|
2,414,978
|
|
|
|
3,039,721
|
|
|
|
5,454,699
|
|
2013
|
|
|
2,965,968
|
|
|
|
3,037,375
|
|
|
|
6,003,343
|
|
2014
|
|
|
12,134,932
|
|
|
|
15,735,120
|
|
|
|
27,870,052
|
|
Thereafter
|
|
|
3,498,131
|
|
|
|
|
|
|
|
3,498,131
|
|
|
|
Note 10
|
Operating
Leases
|
The Company leases all of the real property used in its business
for office space, retail pharmacy locations and sleep testing
facilities under operating lease agreements. Rent is expensed as
paid consistent with the terms of each lease agreement over the
term of each lease. In addition to minimum lease payments,
certain leases require reimbursement for common area maintenance
and insurance, which are expensed when incurred.
The Companys rental expense for operating leases in 2009
and 2008 was $1,558,478 and $944,834, respectively. The
Companys rental expense for operating leases in 2009 and
2008, included in discontinued operations, was $1,232,613 and
$932,031, respectively.
Following is a summary of the future minimum lease payments
under operating leases as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ApothecaryRx
|
|
|
|
|
|
|
|
|
|
(Discontinued
|
|
|
|
|
|
|
SMS
|
|
|
Operations)
|
|
|
Total
|
|
|
2010
|
|
$
|
2,073,274
|
|
|
$
|
915,186
|
|
|
$
|
2,988,460
|
|
2011
|
|
|
1,647,846
|
|
|
|
573,827
|
|
|
|
2,221,673
|
|
2012
|
|
|
1,218,950
|
|
|
|
443,488
|
|
|
|
1,662,438
|
|
2013
|
|
|
977,313
|
|
|
|
323,222
|
|
|
|
1,300,535
|
|
2014
|
|
|
578,255
|
|
|
|
239,587
|
|
|
|
817,842
|
|
Thereafter
|
|
|
2,785,916
|
|
|
|
705,059
|
|
|
|
3,490,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,281,554
|
|
|
$
|
3,200,369
|
|
|
$
|
12,481,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
The income tax provision for the years ended December 31,
2009 and 2008 consists of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current provision
|
|
$
|
|
|
|
$
|
|
|
Deferred benefit
|
|
|
(2,273,000
|
)
|
|
|
(9,660,000
|
)
|
Change in beginning of year valuation allowance
|
|
|
2,273,000
|
|
|
|
9,660,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Current provision, discontinued operations
|
|
$
|
|
|
|
$
|
136,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities as of
December 31, 2009 and 2008 are comprised of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
289,000
|
|
|
$
|
58,000
|
|
Accrued liabilities
|
|
|
51,000
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
134,000
|
|
Valuation allowance
|
|
|
(57,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
283,000
|
|
|
|
134,000
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
9,025,000
|
|
|
|
9,342,000
|
|
Net operating loss carryforwards
|
|
|
3,231,000
|
|
|
|
902,000
|
|
State tax credit carryforwards
|
|
|
400,000
|
|
|
|
400,000
|
|
Intangible assets
|
|
|
278,000
|
|
|
|
|
|
Acquisition costs
|
|
|
104,000
|
|
|
|
110,000
|
|
Stock awards
|
|
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,117,000
|
|
|
|
10,754,000
|
|
Valuation allowance
|
|
|
(12,560,000
|
)
|
|
|
(10,344,000
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term deferred tax assets
|
|
|
557,000
|
|
|
|
410,000
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Tax accounting changes
|
|
|
283,000
|
|
|
|
486,000
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
557,000
|
|
|
|
58,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The change in the Companys valuation allowance on deferred
tax assets during the years ended December 31, 2009 and
2008 follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning valuation allowance
|
|
$
|
10,344,000
|
|
|
$
|
684,000
|
|
Change in valuation allowance
|
|
|
2,273,000
|
|
|
|
9,660,000
|
|
|
|
|
|
|
|
|
|
|
Ending valuation allowance
|
|
$
|
12,617,000
|
|
|
$
|
10,344,000
|
|
|
|
|
|
|
|
|
|
|
F-25
The Companys effective income tax rate for continuing
operations differs from the U.S. Federal statutory rate as
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Change in valuation allowance
|
|
|
(43.8
|
)
|
|
|
(38.9
|
)
|
State tax, net
|
|
|
|
|
|
|
|
|
Other
|
|
|
8.8
|
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company had federal and state net
operating loss carryforwards of approximately $9,231,000,
expiring at various dates through 2024. Approximately $3,012,000
of the Companys net operating loss carryforwards are
subject to an annual limitation of approximately $218,000.
During the years ended December 31, 2009 and 2008, the
Company had income from discontinued operations of $6,896 and
$60,932, respectively, which was net of income taxes of
$ and $72,000, respectively.
The amount of income taxes the Company pays is subject to
ongoing examinations by federal and state tax authorities. To
date, there have been no reviews performed by federal or state
tax authorities on any of the Companys previously filed
returns. The Companys 2003 and later tax returns are still
subject to examination.
|
|
Note 12
|
Capital
Structure
|
During the years ended December 31, 2009 and 2008, the
holders of certain placement agent warrants exercised their
warrants. These warrants were exercisable for the purchase of
66,242 and 224,638 shares, respectively, of common stock
and were issued in connection with our 2003 and 2008 private
placements and convertible note conversion. The warrant holders
elected to use the cashless exercise provisions and,
accordingly, were not required to pay the exercise price ranging
from $1.10 to $5.50 per share. The Company issued 35,104 and
149,723 shares, respectively, of common stock pursuant to
these warrant exercises. In connection with this the issuance of
these common stock shares, no underwriting discounts or
commissions were paid or will be paid.
On September 14, 2009, the Company completed the Eastern
acquisition. In connection with this acquisition, the Company
issued 752,795 shares of common stock shares for $1,544,000
(or $2.05 per share) as a portion of the purchase price
consideration. In connection with the issuance of these common
stock shares, no underwriting discounts or commissions were paid
or will be paid.
On June 4, 2008, the Company completed a private placement
of common stock and issued 3,344,447 shares of common
stock. The proceeds of the private placement offering were
$15,050,047 ($4.50 per share). In connection with this the
issuance of these common stock shares, no underwriting discounts
or commissions were paid or will be paid.
On June 1, 2008, the Company completed the Texas Labs
acquisition. In connection with this acquisition, the Company
issued 130,435 shares of common stock shares for $900,000
(or $6.90 per share) as a portion of the purchase consideration.
In connection with the issuance of these common stock shares, no
underwriting discounts or commissions were paid or will be paid.
On March 13, 2008, the Companys board of directors
approved a reverse split of the Companys common stock at a
ratio of 1 for 5 shares. The effective date of the reverse
split was set as April 11, 2008. The effect of the reverse
split reduced the Companys outstanding shares of common
stock from 117,701,997 to 23,540,399 shares as of the date
of the reverse split.
In January 2008, the Company completed the private placement
offering of 2,999,996 shares of common stock
(599,999 shares after giving effect to 1 for 5 reverse
split) for gross proceeds of $1,050,000 or $0.35 per share
($1.75 per share after giving effect to 1 for 5 reverse split).
Viewtrade Securities, Inc. (Viewtrade) served as the
placement agent and received sales commissions of $80,000 (10%
of the gross proceeds;
F-26
excluding $250,000 not sold by the placement agent), a
non-accountable expense allowance of $31,500 (3% of the gross
proceeds) and common stock purchase warrants exercisable for the
purchase of 450,000 shares of common stock at $0.385 each
(90,000 shares at $1.93 after giving effect to 1 for 5
reverse split). The fair value of each warrant issued was
estimated on the date of issuance using the Black-Scholes option
pricing model. The fair value of the warrants was based on the
difference between the present value of the exercise price of
the option and the estimated fair value price of the common
share. The fair value of the warrants was estimated to be
approximately $141,000. The issuance of the warrants to the
underwriter resulted in additional paid-in capital of $141,000
related to the services performed by the underwriter in
conjunction with the private placement offering which was offset
by a reduction of paid-in capital of $141,000 related to the
payment for those services which is included in offering costs.
|
|
Note 13
|
Stock
Options, Grants and Warrants
|
The Company has adopted three stock option plans, the 2008
Long-Term Incentive Plan (the Incentive Plan), the
2003 Stock Option Plan (the Employee Plan) and the
2003 Non-Employee Stock Option Plan (the Non-Employee
Plan).
The Incentive Plan consists of three separate stock incentive
plans, a Non-Executive Officer Participant Plan, an Executive
Officer Participant Plan and a Non-Employee Director Participant
Plan. Except for administration and the category of employees
eligible to receive incentive awards, the terms of the
Non-Executive Officer Participant Plan and the Executive Officer
Participant Plan are identical. The Non-Employee Director Plan
has other variations in terms and only permits the grant of
nonqualified stock options and restricted stock awards. Each
incentive award will be pursuant to a written award agreement.
The number of shares of common stock authorized and reserved
under the Incentive Plan is 3,000,000.
The Employee Plan provides for the issuance of options intended
to qualify as incentive stock options for federal income tax
purposes to our employees, including employees who also serve as
a Company director. The number of shares of common stock
authorized and reserved under the Employee Plan is 60,000. The
exercise price of options may not be less than 85% of the fair
market value of our common stock on the date of grant of the
option.
The Non-Employee Plan provides for the grant of stock options to
the Companys non-employee directors, consultants and other
advisors. The Companys employees are not eligible to
participate in the Non-Employee Plan. Under the provisions of
this plan, the options do not qualify as incentive stock options
for federal income tax purposes. The total number of shares of
common stock authorized and reserved under the Non-Employee Plan
is 60,000.
The fair value of each option and warrant grant is estimated on
the date of grant using the Black-Scholes option pricing model.
The determination of the fair value of stock-based payment
awards on the date of grant using an option-pricing model is
affected by the Companys stock price as well as
assumptions regarding a number of complex and subjective
variables. These variables include the expected stock price
volatility over the term of the awards, actual and projected
employee stock option exercise behaviors, risk-free interest
rate and expected dividends. Given the Companys limited
trading history and lack of employee option exercise history,
the Company has included the assumptions and variables of
similar companies in the determination of the actual variables
used in the option pricing model. The Company bases the
risk-free interest rate used in the option pricing model on
U.S. Treasury zero-coupon issues. The Company does not
anticipate paying any cash dividends in the foreseeable future
and therefore an expected dividend yield of zero is used in the
option pricing model.
The assumptions used to value the option and warrant grants are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Expected life (in years)
|
|
|
1.0 - 3.5
|
|
|
|
3.5 - 5.0
|
|
Volatility
|
|
|
55
|
%
|
|
|
38-46
|
%
|
Risk free interest rate
|
|
|
0.4 - 2.0
|
%
|
|
|
3.5 - 4.0
|
%
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
F-27
Information with respect to stock options and warrants
outstanding follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at December 31, 2007
|
|
|
1,064,650
|
|
|
$
|
7.15
|
|
Granted warrants
|
|
|
202,500
|
|
|
|
1.47
|
|
Granted options
|
|
|
164,091
|
|
|
|
4.02
|
|
Exercised warrants
|
|
|
(224,638
|
)
|
|
|
(3.01
|
)
|
Forfeited warrants
|
|
|
(596,000
|
)
|
|
|
(10.00
|
)
|
Forfeited options
|
|
|
(20,000
|
)
|
|
|
(6.25
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
590,603
|
|
|
|
3.04
|
|
Granted warrants
|
|
|
100,000
|
|
|
|
2.05
|
|
Granted options
|
|
|
232,860
|
|
|
|
3.14
|
|
Exercised warrants
|
|
|
(66,242
|
)
|
|
|
1.65
|
|
Forfeited options
|
|
|
(30,358
|
)
|
|
|
5.24
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
826,863
|
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and Warrants
|
|
|
Options and Warrants Outstanding
|
|
Exercisable
|
|
|
Shares
|
|
Average
|
|
Average
|
|
Shares
|
|
Average
|
|
|
Outstanding
|
|
Remaining
|
|
Exercise
|
|
Outstanding
|
|
Exercise
|
|
|
at 12/31/09
|
|
Life (Years)
|
|
Price
|
|
at 12/31/09
|
|
Price
|
|
$1.01 to $3.00
|
|
|
553,130
|
|
|
|
2.4
|
|
|
$
|
2.40
|
|
|
|
483,603
|
|
|
$
|
2.42
|
|
$3.01 to $5.00
|
|
|
232,195
|
|
|
|
2.3
|
|
|
|
3.90
|
|
|
|
232,195
|
|
|
|
3.90
|
|
$5.01 to $7.00
|
|
|
41,538
|
|
|
|
0.9
|
|
|
|
5.54
|
|
|
|
41,538
|
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
826,863
|
|
|
|
|
|
|
|
|
|
|
|
757,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the 232,860 and 164,091 options issued in 2009
and 2008 was estimated to be approximately $103,000 and
$244,000, respectively. The value of the options is recorded as
compensation expense or, in the case of non-employee third
parties, as professional services expense over the requisite
service period which equals the vesting period of the options.
Compensation expense related to stock options was $39,000 and
$244,000 during 2009 and 2008, respectively. During 2009, the
Company recorded $14,581 in professional services fees for
options issued to an investor relations firm.
During 2009, the Company issued 100,000 warrants to Viewtrade
for the performance of financial services. The fair value of the
warrants was estimated to be approximately $87,000 and was
recorded as professional services expense over the vesting
period in 2009.
The options and warrants outstanding and options and warrants
exercisable as of December 31, 2009 and 2008 had no
intrinsic value. The intrinsic value is calculated as the
difference between the market value and exercise price of the
shares. As of December 31, 2009, there was approximately
$52,000 of unrecognized compensation expense related to unvested
stock options.
F-28
Information with respect to the Companys restricted stock
awards follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
Unvested Restricted Stock Awards
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2007
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
150,000
|
|
|
|
1.90
|
|
Vested
|
|
|
(20,000
|
)
|
|
|
3.85
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
130,000
|
|
|
|
1.60
|
|
Granted
|
|
|
702,669
|
|
|
|
1.94
|
|
Vested
|
|
|
(287,669
|
)
|
|
|
1.96
|
|
Forfeited
|
|
|
(120,000
|
)
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009
|
|
|
425,000
|
|
|
$
|
1.90
|
|
|
|
|
|
|
|
|
|
|
During 2009 and 2008, the Company issued 702,669 and 150,000,
respectively, restricted stock grant awards to certain key
employees and directors. The fair value of the restricted stock
grant awards was $1,365,704 and $285,000, respectively, and was
calculated by multiplying the number of restricted shares issued
times the closing share price on the date of issuance. The value
of the stock grants is recorded as compensation over the
requisite service period which equals vesting period of the
stock award. During 2009 and 2008, the Company recorded
compensation expense related to stock grant awards of
approximately $682,000 and $93,000, respectively. As of
December 31, 2009 and 2008, the Company has unrecognized
compensation expense associated with the stock grants, options
and warrants of approximately $754,000 and $192,000,
respectively.
|
|
Note 14
|
Segment
Information
|
The Company operates in two reportable business segments: SMS
and ApothecaryRx. The SMS operating segment provides diagnostic
sleep testing services and care management solutions for people
with chronic sleep disorders. In addition, the Company sells
equipment and related supplies and components used to treat
sleep disorders. The ApothecaryRx operating segment operates
retail pharmacy stores throughout the central United States. The
ApothecaryRx operating segment is included in discontinued
operations; see Note 5 Discontinued Operations.
The Companys film production and distribution activities
are included in discontinued operations. The Companys
remaining operations which primarily involve administrative
activities associated with operating as a public company are
identified as Other.
F-29
Reportable business segment information for the years ended
December 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
SMS
|
|
|
ApothecaryRx
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
17,571,539
|
|
|
$
|
89,669,301
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
107,240,840
|
|
Segment operating profit (loss)
|
|
|
(4,121,932
|
)
|
|
|
1,992,005
|
|
|
|
|
|
|
|
(3,218,671
|
)
|
|
|
(5,348,598
|
)
|
Income from discontinued operations, net of taxes
|
|
|
|
|
|
|
1,992,005
|
|
|
|
6,896
|
|
|
|
|
|
|
|
1,998,901
|
|
Depreciation and amortization
|
|
|
1,069,580
|
|
|
|
1,114,347
|
|
|
|
|
|
|
|
4,552
|
|
|
|
2,188,479
|
|
Interest expense (income), net
|
|
|
1,049,515
|
|
|
|
1,334,559
|
|
|
|
|
|
|
|
(142,645
|
)
|
|
|
2,241,429
|
|
Change in accounting estimate
|
|
|
2,648,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,648,207
|
|
Noncontrolling interests
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,806
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
36,863,976
|
|
|
|
37,399,351
|
|
|
|
120,150
|
|
|
|
1,483,800
|
|
|
|
75,867,277
|
|
Capital expenditures
|
|
|
1,003,051
|
|
|
|
263,336
|
|
|
|
|
|
|
|
114,567
|
|
|
|
1,380,954
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
15,292,164
|
|
|
$
|
81,329,158
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
96,621,322
|
|
Segment operating profit (loss)
|
|
|
2,412,833
|
|
|
|
881,691
|
|
|
|
|
|
|
|
(1,922,088
|
)
|
|
|
1,372,436
|
|
Income from discontinued operations, net of taxes
|
|
|
|
|
|
|
745,691
|
|
|
|
60,932
|
|
|
|
|
|
|
|
806,623
|
|
Depreciation and amortization
|
|
|
595,214
|
|
|
|
972,665
|
|
|
|
|
|
|
|
3,413
|
|
|
|
1,571,292
|
|
Interest expense (income), net
|
|
|
870,806
|
|
|
|
1,358,882
|
|
|
|
|
|
|
|
(174,625
|
)
|
|
|
2,055,063
|
|
Noncontrolling interests
|
|
|
552,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552,970
|
|
Income tax expense (benefit)
|
|
|
309,000
|
|
|
|
146,000
|
|
|
|
|
|
|
|
(319,000
|
)
|
|
|
136,000
|
|
Segment assets
|
|
|
28,743,861
|
|
|
|
39,944,929
|
|
|
|
117,135
|
|
|
|
12,527,705
|
|
|
|
81,333,630
|
|
Capital expenditures
|
|
|
1,130,341
|
|
|
|
386,444
|
|
|
|
|
|
|
|
4,675
|
|
|
|
1,521,460
|
|
|
|
Note 15
|
Related
Party Transactions
|
As of December 31, 2009 and 2008, the Company had
approximately $0.7 million and $12.8 million on
deposit at Valliance Bank. Valliance Bank is controlled by
Mr. Roy T. Oliver, one of the Companys greater than
5% shareholders and affiliates. In addition, the Companys
SMS operating segment is obligated to Valliance Bank under
certain sleep center capital notes totaling approximately
$193,000 and $189,000 at December 31, 2009 and 2008,
respectively. The interest rates on the notes are fixed and
range from 4.25% to 8.75%. Non-controlling interests in
Valliance Bank are held by Mr. Stanton Nelson, the
Companys chief executive officer and Mr. Joseph
Harroz, Jr., the Companys president. Mr. Nelson
also serves as a director of Valliance Bank.
The Companys corporate headquarters and offices and the
executive offices of SDC Holdings are occupied under a month to
month lease with Oklahoma Tower Realty Investors, LLC, requiring
monthly rental payments of approximately $10,300. Mr. Roy
T. Oliver, one of the Companys greater than 5%
shareholders and affiliates, controls Oklahoma Tower Realty
Investors, LLC (Oklahoma Tower). During the years
ended December 31, 2009 and 2008, the Company incurred
approximately $132,000 and $31,000, respectively, in lease
expense under the terms of the lease. Mr. Stanton Nelson,
the Companys chief executive officer, owns a
non-controlling interest in Oklahoma Tower Realty Investors, LLC.
During 2009, the Company paid Specialty Construction Services,
LLC approximately $255,000, primarily for construction of
leasehold improvements at our Norman, Oklahoma facility. During
2008, the Company
F-30
paid Specialty Construction Services, LLC approximately $126,000
to construct the leasehold improvements at our and SDC
Holdings offices in Oklahoma City. Non-controlling
interests in Specialty Construction Services, LLC are held by
Roy T. Oliver, one of the Companys greater than 5%
shareholders and affiliates, and Mr. Stanton Nelson, our
Chief Executive Officer.
During the years ended December 31, 2009 and 2008, the
Company paid approximately $24,000 and $25,000, respectively, to
R.T. Oliver Investments, Inc. for air travel expenses.
Mr. Roy T. Oliver, one of the Companys greater than
5% shareholders and affiliates, controls R.T. Oliver
Investments, Inc. Mr. Stanton Nelson, the Companys
chief executive officer, owns a non-controlling interest in R.T.
Oliver Investments, Inc.
The corporate offices of the Companys Somni business units
are occupied under a
60-month
lease with Tripod, L.L.C. (Tripod), requiring
monthly rental payments of $14,719; the lease matures on
September 30, 2011. Dr. Steven Hull, the president of
the Somni business units, has an ownership interest in Tripod.
During the year ended December 31, 2009, the Company
incurred $58,875 in lease expense under the terms of the lease.
|
|
Note 16
|
Earnings
(Loss) per Share
|
Basic earnings (loss) per share is computed using the
weighted-average number of common shares outstanding. The
dilutive effect of potential common shares outstanding is
included in diluted earnings (loss) per share. The computation
of basic earnings (loss) per share and diluted earnings (loss)
per share for the years ended December 31, 2009 and 2008 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(7,494,409
|
)
|
|
$
|
(62,225
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
28,414,508
|
|
|
|
25,885,628
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
|
|
|
|
217,213
|
|
|
|
|
|
|
|
|
|
|
Diluted potential common shares
|
|
|
28,414,508
|
|
|
|
26,102,841
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.25
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.25
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
1,998,901
|
|
|
$
|
806,623
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
28,414,508
|
|
|
|
25,885,628
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
|
|
|
|
217,213
|
|
|
|
|
|
|
|
|
|
|
Diluted potential common shares
|
|
|
28,414,508
|
|
|
|
26,102,841
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
The dilutive potential common shares on options and warrants is
calculated in accordance with the treasury stock method, which
assumes that proceeds from the exercise of all options and
warrants are used to repurchase common stock at market value.
The amount of shares remaining after the proceeds are exhausted
represents the potential dilutive effect of the securities.
The following securities were not included in the computation of
diluted earnings (loss) per share from continuing operations or
discontinued operations as their effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Stock options and warrants
|
|
|
826,863
|
|
|
|
64,538
|
|
F-31
|
|
Note 17
|
Subsequent
Event
|
On February 25, 2010, the Company issued a total of
80,000 shares in restricted stock grant awards to the
Companys independent directors and one employee. The fair
value of the restricted stock grant awards was $96,000 and was
calculated by multiplying the number of restricted shares issued
times the closing share price on the date of issuance.
On March 25, 2010, the Companys president Joseph
Harroz, Jr. gave notice of his resignation as the President
of Graymark Healthcare, Inc. effective June 30, 2010.
Mr. Harroz will remain on the Companys Board of
Directors. In connection with Mr. Harroz resignation, on
March 25, 2010, Mr. Harroz and the Company entered
into the following arrangements:
|
|
|
|
|
Executed an agreement amending Mr. Harroz employment
agreement with the Company and providing for:
|
|
|
|
|
|
Mr. Harroz to work on a half-time basis for one-half of his
current base salary from April 1, 2010 through
June 30, 2010;
|
|
|
|
Fully accelerated vesting on 112,500 shares of restricted
stock as of March 25, 2010 (150,000 shares pursuant to
2 separate grants were scheduled to vest on July 23, 2010;
it is expected that the 37,500 shares shall be forfeited
upon termination of employment on June 30, 2010); and
|
|
|
|
Granted Mr. Harroz a bonus award of up to $140,000 payable
upon successful completion by the Company of a Significant
Transaction. Mr. Harroz need not be an employee at the time
the bonus is paid. The bonus award must be paid, if at all, on
or before December 31, 2010. For purposes of this award, a
Significant Transaction shall mean a transaction deemed
significant by the Board of Directors and including a financing
transaction, whether equity or debt, or a merger and acquisition
event.
|
On March 25, 2010, the Compensation Committee of the Board
of Directors took the following actions:
|
|
|
|
|
Accelerates the 2010 grant of 100,000 shares of common
stock to Stanton Nelson. This grant is the 2010 grant to
Mr. Nelson pursuant to his employment agreement.
Mr. Nelson has agreed not to transfer or dispose of the
shares of common stock subject to this grant prior to
October 9, 2010 the scheduled date for this grant.
|
|
|
|
Granted Mr. Nelson a bonus award of up to $300,000 payable
upon successful completion by the Company of a Significant
Transaction. The bonus award must be paid, if at all, on or
before December 31, 2010. Mr. Nelson need not be an
employee at the time the bonus is paid.
|
|
|
Note 18
|
Supplemental
Cash Flow Information:
|
Cash payments for interest and income taxes and certain noncash
investing and financing activities for the years ended
December 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
2,442,000
|
|
|
$
|
2,050,000
|
|
Income taxes
|
|
|
39,000
|
|
|
|
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Common stock and stock options issued in business acquisitions
|
|
$
|
1,544,000
|
|
|
$
|
960,000
|
|
Common stock issued in
roll-up of
minority interest holders
|
|
|
|
|
|
|
1,616,356
|
|
Seller-financing of acquisitions
|
|
|
|
|
|
|
726,190
|
|
Seller-financing of acquisitions, discontinued operations
|
|
|
|
|
|
|
3,546,403
|
|
Common stock issued for payment of convertible debt
|
|
|
|
|
|
|
750,000
|
|
F-32
15,000,000 Shares
Graymark Healthcare,
Inc.
Common Stock
Prospectus
,
2011
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the various expenses, all of
which will be borne by the registrant, in connection with the
sale and distribution of the securities being registered, other
than the underwriting discounts and commissions. All amounts
shown are estimates except for the SEC registration fee, and the
FINRA filing fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
4,098.76
|
|
FINRA filing fee
|
|
|
5,800.00
|
|
Transfer agent and registrar fees
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be provided by amendment |
|
|
Item 14.
|
Indemnification
of Officers and Directors
|
Section 1031 of the Oklahoma General Corporation Act
permits (and Registrants Certificate of Incorporation and
Bylaws, which are incorporated by reference herein, authorize)
indemnification of directors and officers of Registrant and
officers and directors of another corporation, partnership,
joint venture, trust or other enterprise who serve at the
request of Registrant, against expenses, including attorneys
fees, judgments, fines and amount paid in settlement actually
and reasonably incurred by such person in connection with any
action, suit or proceeding in which such person is a party by
reason of such person being or having been a director or officer
of Registrant or at the request of Registrant, if he conducted
himself in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of Registrant, and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Registrant
may not indemnify an officer or a director with respect to any
claim, issue or matter as to which such officer or director
shall have been adjudged to be liable to Registrant, unless and
only to the extent that the court in which such action or suit
was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
To the extent that an officer or director is successful on the
merits or otherwise in defense on the merits or otherwise in
defense of any action, suit or proceeding with respect to which
such person is entitled to indemnification, or in defense of any
claim, issue or matter therein, such person is entitled to be
indemnified against expenses, including attorneys fees,
actually and reasonably incurred by him in connection therewith.
The circumstances under which indemnification is granted with an
action brought on behalf of Registrant are generally the same as
those set forth above; however, expenses incurred by an officer
or a director in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of final
disposition upon receipt of an undertaking by or on behalf of
such officer or director to repay such amount if it is
ultimately determined that such officer or director is not
entitled to indemnification by Registrant.
These provisions may be sufficiently broad to indemnify such
persons for liabilities arising under the Securities Act of
1933, as amended (the Act), in which case such
provision is against public policy as expressed in the
1933 Act and is therefore unenforceable.
II-1
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
During the three years preceding the filing of this registration
statement, the registrant sold the following securities, which
were not registered under the Securities Act.
On April 1, 2010, we issued 30,000 shares of common
stock pursuant to restricted stock awards issued under and
pursuant to our 2008 Long-Term Incentive Plan. The shares were
issued at the weighted-average fair market value of $1.00 and
vest as follows: 10,000 shares immediately vested,
10,000 shares vest on April 1, 2011 and
10,000 shares vest on April 1, 2012. In connection
with the issuance of these shares of common stock, no
underwriting discounts or commissions were paid or will be paid.
The shares of common stock were sold without registration under
the Securities Act of 1933, as amended, in reliance on the
registration exemption afforded by Regulation D and more
specifically Rule 506 of Regulation D.
On February 25, 2010, we issued 180,000 shares of
common stock pursuant to restricted stock awards issued under
and pursuant to our 2008 Long-Term Incentive Plan. The shares
were issued at the weighted-average fair market value of $1.16
and immediately vested. On March 25, 2010,
112,500 shares of common stock vested pursuant to
previously issued restricted stock awards. The weighted-average
fair market value of the 112,500 vesting shares on the grant
date was $1.67 per share. In connection with the issuance of
these shares of common stock, no underwriting discounts or
commissions were paid or will be paid. The shares of common
stock were sold without registration under the Securities Act of
1933, as amended, in reliance on the registration exemption
afforded by Regulation D and more specifically
Rule 506 of Regulation D.
On December 31, 2009, we issued 132,348 common stock shares
pursuant to restricted stock awards under and pursuant to our
2008 Long-Term Incentive Plan. On December 31, 2009,
124,319 of the 132,348 common stock shares vested pursuant to
the restricted stock awards. On date of the restricted stock
awards of these vesting shares, 60,000 shares had a fair
market value of $1.60 per share and 64,319 shares had a
market value of $2.44 per share. The 8,029 balance of the shares
were awarded to employees other than executive officers, vested
immediately and were issued at the fair market value of $1.80
per share other than 2,518 shares that were issued at the
fair market value of $1.95 per share. In connection with this
the issuance of these common stock shares, no underwriting
discounts or commissions were paid or will be paid. The common
stock shares were sold without registration under the Securities
Act of 1933, as amended, in reliance on the registration
exemption afforded by Regulation D and more specifically
Rule 506 of Regulation D.
On September 15, 2009, we delivered 652,795 shares of
our common stock to Avastra Sleep Centres Limited in payment of
$1,344,000 of the purchase price of the outstanding stock of
Avastra Eastern Sleep Centers, Inc., and 100,000 shares of
our common stock to Daniel I. Rifkin, M.D. These common
stock shares were sold without registration under the Securities
Act of 1933, as amended, in accordance with Regulation D
and without payment of any sales commissions or other form of
remuneration. The further transferability of these common stock
shares is prohibited unless pursuant to an effective
registration statement and prospectus or pursuant to a
registration exemption available under the Securities Act or the
rules and regulations promulgated under the Securities Act.
During the three months ended December 31, 2008, we awarded
restricted stock awards of 150,000 common stock shares under and
pursuant to our 2008 Long-Term Incentive Plan. On
November 29, 2008, we issued 20,000 common stock shares to
two employees at $3.85 per share, which vested in November 2009.
On December 15, 2008, we issued 30,000 common stock shares
to Rick D. Simpson, our former Chief Financial Officer, and
100,000 common stock shares to Joseph Harroz Jr., our President
and one of our Directors, at $1.54 per share. 50% of these
shares vested in July 2009 and the remainder shall vest in July
2010. In connection with this the issuance of these common stock
shares, no underwriting discounts or commissions were paid or
will be paid. The common stock shares were sold without
registration under the Securities Act of 1933, as amended, in
reliance on the registration exemption afforded by
Regulation D and more specifically Rule 506 of
Regulation D.
On June 3, 2008, we completed a private placement offering
of 3,344,447 common stock shares for $15,050,011.50 or $4.50 per
share. In connection with this offering, no underwriting
discounts or commissions were paid or will be paid. The common
stock shares were sold without registration under the Securities
Act of
II-2
1933, as amended, in reliance on the registration exemption
afforded by Regulation D and more specifically
Rule 506 of Regulation D. In connection with this
sale, the purchasers were provided disclosure information that
principally consisted of a description of our common stock
shares and our Annual Report on
Form 10-K
for the year ended December 31, 2007 and our Quarterly
Report on
Form 10-Q
for the three months ended March 31, 2008. There were four
purchasers of the common stock shares and each qualified as an
accredited investor within the meaning of Rule 501(a) of
Regulation D.
On May 30, 2008, we completed the Texas Labs acquisition.
In connection this acquisition we issued 130,435 common stock
shares for $900,000 (or $6.50 per share) as a portion of the
purchase consideration. In connection with this the issuance of
these common stock shares, no underwriting discounts or
commissions were paid or will be paid. The common stock shares
were sold without registration under the Securities Act of 1933,
as amended, in reliance on the registration exemption afforded
by Regulation D and more specifically Rule 506 of
Regulation D. In connection with this sale, the purchasers
were provided disclosure information that principally consisted
of a description of our common stock shares and our Annual
Report on
Form 10-K
for the year ended December 31, 2007 and our Quarterly
Report on
Form 10-Q
for the three months ended March 31, 2008. There were four
purchasers of the common stock shares and each represented that
it qualified as an accredited investor within the meaning of
Rule 501(a) of Regulation D.
During 2008, the holders of certain placement agent warrants
exercised their warrants. These warrants were exercisable for
the purchase of 291,150 common stock shares and were issued in
connection with our 2003 private placement and convertible note
conversion. The warrant holders elected to use the
cashless exercise provisions and, accordingly, were
not required to pay the exercise price ranging from $1.10 to
$5.50 per share. We issued 149,723 common stock shares pursuant
to these warrant exercises. In connection with this the issuance
of these common stock shares, no underwriting discounts or
commissions were paid or will be paid. The common stock shares
were sold without registration under the Securities Act of 1933,
as amended, in reliance on the registration exemption afforded
by Regulation D and more specifically Rule 506 of
Regulation D. It is believed that each warrant holder
qualified as an accredited investor within the meaning of
Rule 501(a) of Regulation D.
Pursuant to the Exchange Agreement and the related closing, we
agreed to issue 102,000,000 shares of our common stock to
Oliver Company Holdings, LLC, Lewis P. Zeidner, Stanton Nelson,
Vahid Salalati, Greg Luster, William R. Oliver, Kevin Lewis,
John B. Frick Revocable Trust, Roger Ely, James A. Cox, Michael
Gold, Katrina J. Martin Revocable Trust, the former equity
interest owners or in some cases the designee of the former
equity interest owners of SDC Holdings, LLC and ApothecaryRx,
LLC. These common stock shares were offered and sold in
accordance with Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended (the without
registration under the Securities Act. In conjunction with the
sale of these common stock shares, no sales commissions or other
remuneration was paid.
The foregoing shares of common stock described in the table
above were issued in reliance upon Section 4(2) of the
Securities Act of 1933 as a transaction by an issuer not
involving a public offering. Each holder had adequate access to
information about the registrant through his relationship with
the registrant or through information provided to him.
The registrant did not, nor does it plan to, pay or give,
directly or indirectly, any commission or other remuneration,
including underwriting discounts or commissions, in connection
with any of the issuances of securities listed above. In
addition, each of the certificates issued representing the
securities in the transactions listed above bears a restrictive
legend permitting the transfer thereof only in compliance with
applicable securities laws. The recipients of securities in each
of the transactions listed above represented to the registrant
their intention to acquire the securities for investment only
and not with a view to or for sale in connection with any
distribution thereof. All recipients had or have adequate
access, through their employment or other relationship with the
registrant or through other access to information provided by
our company, to information about our company.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits
II-3
See Index of Exhibits on the page immediately preceding the
exhibits for a list of exhibits filed as part of this
registration statement on
Form S-1,
which is hereby incorporated by reference.
(b) Financial Statement Schedules.
All other schedules have been omitted because they are either
inapplicable or the required information has been given in the
consolidated financial statements or the notes thereto.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrants
annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plans
annual report pursuant to section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(2) for purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(3) for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of
the trustee to act under subsection (a) of Section 310
of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under
Section 305(b)(2) of the Act.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Oklahoma City, State of Oklahoma,
on the 30th day of December, 2010.
GRAYMARK HEALTHCARE, INC.
Stanton Nelson
Chief Executive Officer
We, the undersigned directors
and/or
officers of Graymark Healthcare, Inc (the Company),
hereby severally constitute and appoint Stanton Nelson, Edward
M. Carriero, Jr. and Grant A. Christianson and each of them
singly, our true and lawful attorneys, with full power to any of
them, and to each of them singly, to sign for us and in our
names in the capacities indicated below the registration
statement on
Form S-1
filed herewith, and any and all pre-effective amendments to said
registration statement, and any registration statement filed
pursuant to Section 462(b) under the Securities Act of
1933, as amended, in connection with the registration under the
Securities Act of 1933, as amended, of equity securities of the
Company, and to file or to cause to be filed the same, with all
exhibits thereto and documents in connection therewith, the
Securities and Exchange Commission, granting unto said
attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby
ratifying and confirming all that said attorneys, and each of
them, or their substitute or substitutes, shall do or cause to
be done by this Power of attorney.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by
the following persons in the capacities indicated on
December 30, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Stanton
Nelson
Stanton
Nelson
|
|
Chief Executive Officer and Chairman of the Board
|
|
|
|
/s/ Edward
M. Carriero, Jr.
Edward
M. Carriero, Jr.
|
|
Chief Financial Officer
|
|
|
|
/s/ Lewis
P. Zeidner
Lewis
P. Zeidner
|
|
Chief Operating Officer
|
|
|
|
/s/ Grant
A. Christianson
Grant
A. Christianson
|
|
Chief Accounting Officer
|
|
|
|
/s/ Joseph
Harroz, Jr.
Joseph
Harroz, Jr.
|
|
Director
|
|
|
|
/s/ Scott
Mueller
Scott
Mueller
|
|
Director
|
|
|
|
/s/ S.
Edward Dakil, M.D.
S.
Edward Dakil, M.D.
|
|
Director
|
|
|
|
/s/ Steven
List
Steven
List
|
|
Director
|
II-5
EXHIBIT INDEX
The following documents are filed as exhibits to this
registration statement.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Registrants Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3.1.1 of Registrants
Quarterly Report on Form 10-Q filed with the U.S. Securities and
Exchange Commission on August 14, 2008.
|
|
3
|
.2
|
|
Registrants Amended and Restated Bylaws, incorporated by
reference to Exhibit 3.2 of Registrants Quarterly Report
on Form 10-Q as filed with the Commission on August 14, 2008.
|
|
4
|
.1
|
|
Form of Certificate of Common Stock of Registrant, incorporated
by reference to Exhibit 4.1 of Registrants Registration
Statement on Form SB-2 (No. 333-111819) as filed with the
Commission on January 9, 2004.
|
|
4
|
.2
|
|
Form of Amended and Restated Common Stock Purchase Warrant
Agreement issued to SXJE, LLC and dated March 2007, is
incorporated by reference to Exhibit 4.2 of the
Registrants Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission on March 31, 2010.
|
|
4
|
.3
|
|
Financial Advisor Warrant Agreement issued to ViewTrade
Securities, Inc. and dated June 11, 2009, is incorporated by
reference to Exhibit 4.7 of the Registrants Annual Report
on Form 10-K filed with the U.S. Securities and Exchange
Commission on March 31, 2010.
|
|
5
|
.1*
|
|
Opinion of McAfee & Taft, P.C.
|
|
10
|
.1
|
|
Graymark Productions, Inc. 2003 Stock Option Plan, incorporated
by reference to Exhibit 10.5 of Registrants Registration
Statement on Form SB-2 (No. 333-111819) as filed with the
Commission on January 9, 2004.
|
|
10
|
.2
|
|
Graymark Productions, Inc. 2003 Non-Employee Stock Option Plan,
incorporated by reference to Exhibit 10.6 of Registrants
Registration Statement on Form SB-2 (No. 333-111819) as filed
with the Commission on January 9, 2004.
|
|
10
|
.3
|
|
Graymark Healthcare, Inc. 2008 Long-term Incentive Plan adopted
by Registrant on the effective date of October 29, 2008, is
incorporated by reference to Exhibit 4.1 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on December 9, 2008.
|
|
10
|
.3.1
|
|
Graymark Healthcare, Inc. 2008 Long-term Incentive Plan, Form of
Restricted Stock Award Agreement, is incorporated by reference
to Exhibit 10.3.1 of the Registrants Annual Report on Form
10-K filed with the U.S. Securities and Exchange Commission on
March 31, 2010.
|
|
10
|
.3.2
|
|
Graymark Healthcare, Inc. 2008 Long-term Incentive Plan, Form of
Stock Option Agreement, is incorporated by reference to Exhibit
10.3.2 of the Registrants Annual Report on Form 10-K filed
with the U.S. Securities and Exchange Commission on March 31,
2010.
|
|
10
|
.4
|
|
Exchange Agreement between Registrant, SDC Holdings, LLC, SDOC
Investors, LLC, Vahid Salalati, Greg Luster, Kevin Lewis, Roger
Ely, ApothecaryRx, LLC, Oliver RX Investors, LLC, Lewis P.
Zeidner, Michael Gold, James A. Cox, and John Frick, dated
October 29, 2007, is incorporated by reference to
Registrants Schedule 14 Information Statement filed with
the U.S. Securities and Exchange Commission on December 5, 2007.
|
|
10
|
.5
|
|
Registration Rights Agreement between Registrant, Oliver Company
Holdings, LLC, Lewis P. Zeidner, Stanton Nelson, Vahid Salalati,
Greg Luster, William R. Oliver, Kevin Lewis, John B. Frick
Revocable Trust, Roger Ely, James A. Cox, Michael Gold, Katrina
J. Martin Revocable Trust, dated January 2, 2008, is
incorporated by reference to Registrants Schedule 14
Information Statement filed with the U.S. Securities and
Exchange Commission on December 5, 2007.
|
|
10
|
.6
|
|
Asset Purchase Agreement among ApothecaryRx, LLC, Rambo
Pharmacy, Inc. and Norman Greenburg, dated January 3, 2008, is
incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on January 29, 2008.
|
|
10
|
.7
|
|
Goodwill Protection Agreement between ApothecaryRx, LLC, Rambo
Pharmacy, inc. and Norman Greenburg, dated January 12, 2008, is
incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on January 29, 2008.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.8
|
|
Employment Agreement between ApothecaryRx, LLC and Aric
Greenburg, dated January 17, 2008, is incorporated by reference
to Exhibit 10.3 of the Registrants Current Report on Form
8-K filed with the U.S. Securities and Exchange Commission on
January 29, 2008.
|
|
10
|
.9
|
|
Transition Agreement between ApothecaryRx, LLC, Rambo Pharmacy,
Inc. and Norman Greenburg, dated January 17, 2008, is
incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on January 29, 2008.
|
|
10
|
.10
|
|
Lease Agreement between ApothecaryRx, LLC and Rambo Pharmacy,
Inc., dated January 12, 2008, is incorporated by reference to
Exhibit 10.5 of the Registrants Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on
January 29, 2008.
|
|
10
|
.11
|
|
Asset Purchase Agreement between ApothecaryRx, LLC and Thrifty
Drug Stores, Inc., dated February 8, 2008, is incorporated by
reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed with the U.S. Securities and Exchange
Commission on March 6, 2008.
|
|
10
|
.12
|
|
Goodwill Protection Agreement between ApothecaryRx, LLC and
Thrifty Drug Stores, Inc., dated February 29, 2008, is
incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on March 6, 2008.
|
|
10
|
.13
|
|
Pharmacy Purchase Agreement between ApothecaryRx, LLC,
Rehn-Huerbinger Drug Co., 666 Drug Co., Wilmette-Huerbinger Drug
Co., Edward Cox, Simpson Gold, Lawrence Horwitz, and Steven
Feinerman, dated May 2, 2008, is incorporated by reference to
Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on June
6, 2008.
|
|
10
|
.13.1
|
|
First Amendment to Pharmacy Purchase Agreement between
ApothecaryRx, LLC, Rehn-Huerbinger Drug Co., 666 Drug Co.,
Wilmette-Huerbinger Drug Co., Edward Cox, Simpson Gold, Lawrence
Horwitz, and Steven Feinerman, dated May 23, 2008, is
incorporated by reference to Exhibit 10.7 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on June 6, 2008.
|
|
10
|
.13.2
|
|
Second Amendment to Pharmacy Purchase Agreement between
ApothecaryRx, LLC, Rehn-Huerbinger Drug Co., 666 Drug Co.,
Wilmette-Huerbinger Drug Co., Edward Cox, Simpson Gold, Lawrence
Horwitz, and Steven Feinerman, dated June 3, 2008, is
incorporated by reference to Exhibit 10.8 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on June 6, 2008.
|
|
10
|
.14
|
|
Goodwill Protection agreement between ApothecaryRx, LLC, Edward
Cox, Simpson Gold and Lawrence Horwitz, dated June 3, 2008, is
incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on June 6, 2008.
|
|
10
|
.15
|
|
Employment Agreement between ApothecaryRx, LLC and Lawrence
Horwitz, dated June 3, 2008, is incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on June
6, 2008.
|
|
10
|
.16
|
|
Employment Agreement between ApothecaryRx, LLC and Steven
Feinerman, dated June 3, 2008, is incorporated by reference to
Exhibit 10.4 of the Registrants Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on June
6, 2008.
|
|
10
|
.17
|
|
Employment Agreement between ApothecaryRx, LLC and Edward Cox,
dated June 3, 2008, is incorporated by reference to Exhibit 10.5
of the Registrants Current Report on Form 8-K filed with
the U.S. Securities and Exchange Commission on June 6, 2008.
|
|
10
|
.18
|
|
Employment Agreement between ApothecaryRx, LLC and Simpson Gold,
dated June 3, 2008, is incorporated by reference to Exhibit 10.6
of the Registrants Current Report on Form 8-K filed with
the U.S. Securities and Exchange Commission on June 6, 2008.
|
|
10
|
.19
|
|
Purchase Agreement between TCSD of Waco, LLC and Sleep Center of
Waco, Ltd., dated May 30, 2008, is incorporated by
reference to Exhibit 10.3 of the Registrants Current
Report on Form 8-K filed with the U.S. Securities and Exchange
Commission on June 13, 2008.
|
|
10
|
.20
|
|
Purchase Agreement between Capital Sleep Management, LLC, Plano
Sleep Center, Ltd., and Southlake Sleep Center, Ltd., dated May
30, 2008, is incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on June 13, 2008.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.21
|
|
Asset Purchase Agreement between SDC Holdings, LLC, Christina
Molfetta and Hanna Friends Trust, dated June 1, 2008, is
incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on June 13, 2008.
|
|
10
|
.22
|
|
Loan Agreement between Registrant, SDC Holdings, LLC,
ApothecaryRx, LLC, Oliver Company Holdings, LLC, Roy T. Oliver,
Stanton M. Nelson, Roy T. Oliver as Trustee of the Roy T. Oliver
Revocable Trust dated June 15, 2004, Vahid Salalati, Greg
Luster, Kevin Lewis, Roger Ely and Lewis P. Zeidner and Arvest
Bank, dated May 21, 2008 is incorporated by reference to Exhibit
10.31 of the Registrants Annual Report on Form 10-K filed
with the U.S. Securities and Exchange Commission on March 31,
2009.
|
|
10
|
.22.1
|
|
Amendment to Loan Agreement between Registrant, SDC Holdings,
LLC, ApothecaryRx, LLC, Oliver Company Holdings, LLC, Roy T.
Oliver, Stanton M. Nelson, Roy T. Oliver as Trustee of the Roy
T. Oliver Revocable Trust dated June 15, 2004, Vahid Salalati,
Greg Luster, Kevin Lewis, Roger Ely and Lewis P. Zeidner and
Arvest Bank, effective May 21, 2008 is incorporated by reference
to Exhibit 10.32 of the Registrants Annual Report on Form
10-K filed with the U.S. Securities and Exchange Commission
on March 31, 2009.
|
|
10
|
.22.2
|
|
Second Amendment to Loan Agreement between Registrant, SDC
Holdings, LLC, ApothecaryRx, LLC, Oliver Company Holdings, LLC,
Roy T. Oliver, Stanton M. Nelson, Roy T. Oliver as Trustee of
the Roy T. Oliver Revocable Trust dated June 15, 2004, Vahid
Salalati, Greg Luster, Kevin Lewis, Roger Ely and Lewis P.
Zeidner and Arvest Bank, effective May 21, 2008, is incorporated
by reference to Exhibit 10.1 of the Registrants Quarterly
Report on Form 10 Q filed with the U.S. Securities and Exchange
Commission on August 14, 2009.
|
|
10
|
.22.3+
|
|
Third Amendment to Loan Agreement between Registrant, SDC
Holdings, LLC, ApothecaryRx, LLC, Oliver Company Holdings, LLC,
Roy T. Oliver, Stanton M. Nelson, Roy T. Oliver as Trustee of
the Roy T. Oliver Revocable Trust dated June 15, 2004, Vahid
Salalati, Greg Luster, Kevin Lewis, Roger Ely and Lewis P.
Zeidner and Arvest Bank, effective May 21, 2008.
|
|
10
|
.23
|
|
Stock Sale Agreement dated August 19, 2009 by and among SDC
Holdings, LLC, AvastraUSA, Inc. and Avastra Sleep Centers
Limited, is incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8 K filed with the U.S.
Securities Exchange Commission on August 26, 2009.
|
|
10
|
.23.1
|
|
First Amendment to Stock Sale Agreement dated August 23, 2009
among SDC Holdings, LLC, AvastraUSA, Inc. and Avastra Sleep
Centers Limited, is incorporated by reference to Exhibit 10.2 of
the Registrants Current Report on Form 8 K filed with the
U.S. Securities Exchange Commission on August 26, 2009.
|
|
10
|
.23.2
|
|
Second Amendment to Stock Sale Agreement dated September 14,
2009 among SDC Holdings, LLC, AvastraUSA, Inc. and Avastra Sleep
Centers Limited, is incorporated by reference to Exhibit 10.1 of
the Registrants Current Report on Form 8 K filed with the
U.S. Securities Exchange Commission on September 16, 2009.
|
|
10
|
.24
|
|
Lock up and Stock Pledge Agreement dated September 14, 2009
among Graymark Healthcare, Inc., SDC Holdings, LLC, AvastraUSA,
Inc. and Avastra Sleep Centers Limited, is incorporated by
reference to Exhibit 10.2 of the Registrants Current
Report on Form 8 K filed with the U.S. Securities Exchange
Commission on September 16, 2009.
|
|
10
|
.25
|
|
Settlement Agreement and Release dated September 14, 2009 among
Daniel I. Rifkin, M.D., Graymark Healthcare, Inc., SDC
Holdings, LLC, Avastra Sleep Centers Limited, AvastraUSA, Inc,
is incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K/A filed with the
U.S. Securities Exchange Commission on September 21, 2009.
|
|
10
|
.26
|
|
Amended and Restated Employment Agreement between Registrant and
Grant A. Christianson, dated October 19, 2010, is incorporated
by reference to Exhibit 10.4 of the Registrants Quarterly
Report on Form 10-Q filed with the U.S. Securities and Exchange
Commission on November 15, 2010.
|
|
10
|
.27
|
|
Employment Agreement between Registrant and Stanton Nelson,
dated October 13, 2009, is incorporated by reference to Exhibit
10.1 of the Registrants Current Report on Form 8 K filed
with the U.S. Securities and Exchange Commission on October 14,
2009.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.28
|
|
Amended and Restated Employment Agreement among the Registrant,
Lewis P. Zeidner, and ApothecaryRx, LLC, dated October 13, 2009,
is incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on October 14, 2009.
|
|
10
|
.29
|
|
Employment Agreement between Registrant and Joseph Harroz, Jr.,
dated December 5, 2008, is incorporated by reference to Exhibit
10.2 of Registrants Current Report on Form 8-K filed with
the U.S. Securities and Exchange Commission on December 9, 2008.
|
|
10
|
.30
|
|
Agreement between the Registrant and Joseph Harroz, Jr., dated
March 25, 2010, is incorporated by reference to Exhibit 10.30 of
the Registrants Annual Report on Form 10-K filed with the
U.S. Securities and Exchange Commission on March 31, 2010.
|
|
10
|
.31
|
|
Restricted Stock Award Agreement between the Registrant and
Stanton Nelson, dated March 25, 2010 is incorporated by
reference to Exhibit 10.31 of the Registrants Annual
Report on
Form 10-K
filed with the U.S. Securities and Exchange Commission on March
31, 2010.
|
|
10
|
.32
|
|
Employment Agreement between the Registrant and Edward M.
Carriero, Jr., dated October 5, 2010, is incorporated by
reference to Exhibit 10.3 of the Registrants Quarterly
Report on Form 10-Q filed with the U.S. Securities and Exchange
Commission on November 15, 2010.
|
|
10
|
.33
|
|
Asset Purchase Agreement dated September 1, 2010 among Walgreen
Co., ApothecaryRx, LLC, and, to certain sections only, Graymark
Healthcare, Inc., is incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed on
September 2, 2010.
|
|
10
|
.33.1
|
|
First Amendment to Asset Purchase Agreement dated October 29,
2010 among Walgreen Co., ApothecaryRx, LLC, and, to certain
sections only, Graymark Healthcare, Inc., is incorporated by
reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed on October 29, 2010.
|
|
10
|
.34
|
|
Employment Agreement between Registrant and Rick D. Simpson,
dated December 5, 2008, is incorporated by reference to Exhibit
10.3 of Registrants Current Report on Form 8-K filed with
the U.S. Securities and Exchange Commission on December 9, 2008.
|
|
10
|
.35
|
|
Form of Indemnification Agreement between the Company and each
of its directors and executive officers, is incorporate by
reference to Exhibit 10.1 to the Registrants Current
Report on
Form 8-K
filed on August 24, 2010.
|
|
23
|
.1+
|
|
Consent of Eide Bailly, LLP
|
|
23
|
.2
|
|
Consent of McAfee & Taft, P.C. (included in Exhibit
5.1)
|
|
24
|
.1
|
|
Power of attorney (see page II-5)
|
|
|
|
* |
|
To be filed by amendment. |