As filed with the Securities and Exchange Commission on
March 28, 2011
Registration
No. 333-164232
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
Amendment No. 2
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
MARCH 28, 2011
Preliminary Prospectus
20,000,000 Shares
Graymark Healthcare,
Inc.
Common Stock
We are offering 20,000,000 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 March 24, 2011 was $0.75 per share.
Investing in our common stock involves a high degree of
risk.
See Risk
Factors beginning on page 8.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public Offering Price
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$
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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 3,000,000 shares of our
common stock to cover over-allotments, if any.
Roth Capital Partners
Prospectus
dated ,
2011
TABLE OF
CONTENTS
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EX-10.22.4 |
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 thereto, 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 Apothecary Rx, LLC, our subsidiary
that pertains to our discontinued business of operating
independent retail pharmacies.
We are one of the largest providers of care management solutions
to the sleep disorder market based on the 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.
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 higher revenue
generation per patient compared to our competitors through
increased utilization of our re-
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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 2010 Frost & Sullivan report
estimated the U.S. sleep diagnostic market was
$1.4 billion in 2008, and that it will grow to
$3.4 billion by 2015 for a compound annual growth rate of
14.3%.
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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 26 independent sleep care centers and
72 hospital sleep diagnostic programs, out of a total we
estimate includes 4,000 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 sleep diagnostic and therapy businesses
through acquisition. Over the past several years
our management team has acquired and integrated numerous sleep
diagnostic and therapy businesses.
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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
hospital sleep diagnostic centers 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 plan to grow referral volumes at our
existing facilities using 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 will drive the growth of our
sleep therapy business by referring patients who receive
positive OSA diagnosis from sleep diagnostic tests.
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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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20,000,000 shares |
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Common stock to be outstanding immediately after this offering
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48,953,611 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 $13.3 million, after deducting the
estimated underwriting discounts and estimated offering
expenses. We intend to use approximately $5.5 million of
the net proceeds to partially repay amounts owed under our
credit facility with Arvest Bank and, up to $1.0 million to
repay amounts owed to Valiant Investments, 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 8 for a
discussion of factors that you should consider carefully before
deciding whether to purchase shares of our common stock. |
The number of shares of common stock to be outstanding after
this offering is based on 28,953,611 shares of common stock
outstanding on December 31, 2010. This number excludes, as
of December 31, 2010:
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481,398 shares issuable upon the exercise of outstanding
stock options at a weighted average price of $2.52 per
share; and
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100,270 shares issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $2.05 per share.
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Unless otherwise indicated, this prospectus reflects and assumes
the following:
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no exercise of the underwriters overallotment option; and
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the
one-for-five
reverse stock split affected on April 11, 2008.
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5
Summary
Historical and Pro Forma Consolidated Financial and Other
Data
The following tables present our summary consolidated historical
and pro forma statement of operations data for the fiscal years
ended December 31, 2008, 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 fiscal years ended
December 31, 2008, 2009 and 2010 are derived from our
audited consolidated financial statements as of and for the
fiscal years ended December 31, 2008, 2009 and 2010
included elsewhere in this prospectus. 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 December 31, 2009
have been derived from our unaudited consolidated financial
statements not included in or incorporate 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 period. Our historical results for
prior or 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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Pro Forma
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Actual For Years Ended
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Years Ended
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December 31,
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December 31,
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2008
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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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15,292,164
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$
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17,571,539
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$
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22,764,089
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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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5,779,918
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5,522,932
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7,144,066
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9,959,992
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8,283,306
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Selling, general and administrative
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7,726,693
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13,593,655
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17,277,322
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13,381,041
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17,695,312
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Bad debt expense
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3,768,699
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1,763,736
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3,768,699
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Impairment of goodwill and Intangible assets
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10,751,997
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Impairment of fixed assets
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762,224
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Depreciation and amortization
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598,627
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1,074,132
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1,337,990
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1,160,562
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1,469,148
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,105,238
|
|
|
|
23,959,418
|
|
|
|
39,037,335
|
|
|
|
24,501,595
|
|
|
|
31,216,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
(696,181
|
)
|
|
|
(952,724
|
)
|
|
|
(1,433,395
|
)
|
|
|
(857,396
|
)
|
|
|
(1,108,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(17,706,641
|
)
|
|
|
2,082,375
|
|
|
|
(6,447,845
|
)
|
Benefit (provision) for income taxes
|
|
|
|
|
|
|
|
|
|
|
(166,795
|
)
|
|
|
(636,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(17,873,436
|
)
|
|
|
1,445,723
|
|
|
|
(6,447,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
(1,416,083
|
)
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
1,297,368
|
|
|
|
(5,341,702
|
)
|
|
|
(19,289,519
|
)
|
|
|
2,252,346
|
|
|
|
(4,478,944
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
(153,513
|
)
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) attributable to Graymark Healthcare
|
|
$
|
744,398
|
|
|
$
|
(5,187,896
|
)
|
|
$
|
(19,136,006
|
)
|
|
$
|
1,699,376
|
|
|
$
|
(4,325,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
Unaudited
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual For Years Ended
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
Net earnings per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to
Graymark Healthcare
|
|
$
|
0.00
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.22
|
)
|
Net income (loss) from discontinued operations
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
25,885,628
|
|
|
|
28,414,508
|
|
|
|
28,983,358
|
|
|
|
26,638,423
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding assuming dilution
|
|
|
26,102,841
|
|
|
|
28,414,508
|
|
|
|
28,983,358
|
|
|
|
26,855,636
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents our summary consolidated balance
sheet data as of December 31, 2010:
|
|
|
|
|
on an actual basis; and
|
|
|
|
|
|
on an as adjusted basis to further reflect the receipt by us of
net proceeds of $13.3 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 December 31, 2010
|
|
|
|
Actual
|
|
|
As Adjusted(1)
|
|
|
|
(audited)
|
|
|
(unaudited)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
1,571,057
|
|
|
$
|
9,362,105
|
|
Working capital (deficit)
|
|
|
(20,504,546
|
)
|
|
|
(7,788,658
|
)
|
Total assets
|
|
|
28,692,552
|
|
|
|
36,483,600
|
|
Long-term debt, including current portion
|
|
|
23,205,631
|
|
|
|
18,280,791
|
|
Total liabilities from discontinued operations
|
|
|
2,015,277
|
|
|
|
2,015,277
|
|
Accumulated Deficit
|
|
|
(29,218,977
|
)
|
|
|
(29,218,977
|
)
|
Total stockholders equity
|
|
|
172,429
|
|
|
|
13,457,429
|
|
|
|
|
(1) |
|
Includes cash and cash equivalents from discontinued operations
of $692,261. |
7
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 limited liquidity and we have insufficient capital to fund
our operations for the next twelve months or less.
We have insufficient liquidity to fund our operations for the
next twelve months or less. While we are in the process of
re-engineering our business operations to operate on a positive
operating cash flow basis, we do not have sufficient liquidity
to operate until such time without additional funds.
As of December 31, 2010, we had an accumulated deficit of
approximately $29.2 million and reported a net loss of
approximately $19.1 for the year then ended. We used
approximately $2.4 million in cash from operating
activities of continuing operations during the year ending
December 31, 2010. Furthermore, we have a working capital
deficit of approximately $20.5 million as of
December 31, 2010. We are required to make a
$3 million principal payment to Arvest Bank by
June 30, 2011 and we are not currently in compliance with
certain covenants required by our lending agreement with Arvest
Bank.
We expect to raise $15 million or more in a public stock
offering by the end of April 2011. From the proceeds of the
offering, if any, we will be required to pay the greater of
one-third of the proceeds of the equity offering or
$3 million to Arvest Bank. We also intend to pay an
additional $2.0 million to Arvest Bank in order to pay the
remaining amount of principal and interest through
December 31, 2011 to obtain a waiver from Arvest of the
Debt Service Coverage Ratio and Minimum Net Worth covenants
through such date. We also intend to pay up to $1.0 million
to repay outstanding amounts under our loan with Valiant
Investments. We intend to use the remaining proceeds, if any, to
provide working capital for our continued operations. In the
event that we are unable to obtain debt or equity financing or
we are unable to obtain such financing on terms and conditions
acceptable to us, we may have to cease or severely curtail our
operations.
We have insufficient liquidity to fund our operations for the
next twelve months or less. In addition, any of the following
factors could result in insufficient capital to fund our
operations for a period significantly shorter than twelve months:
|
|
|
|
|
if our capital requirements or cash flow vary materially from
our current projections;
|
|
|
|
|
|
if we are unable to timely collect our accounts receivable;
|
|
|
|
|
|
if we are unable to re-engineer our business operations to
operate on a positive operating cash flow basis;
|
|
|
|
|
|
if we are unable to raise funds to operate our business; and
|
|
|
|
|
|
if other unforeseen circumstances occur.
|
Inability to fund our operations may require us to substantially
curtail our operations, which will likely result in a complete
loss of any investment in shares of our common stock.
8
Our
independent registered public accounting firm has expressed
substantial doubt about our ability to continue as a going
concern. This report may impair our ability to raise additional
financing and adversely affect the price of our common
stock.
The report of our independent registered public accounting firm
contained in our consolidated financial statements as of and for
the year ended December 31, 2010 includes a paragraph that
explains that we have incurred significant operating losses,
have serious liquidity issues and may require additional
financing in the foreseeable future. The report concludes that
these matters, among others, raise substantial doubt about our
ability to continue as a going concern. Reports of independent
auditors questioning a companys ability to continue as a
going concern are generally viewed unfavorably by analysts and
investors. This report may make it difficult for us to raise
additional financing necessary to grow or operate our business.
We
have a bank credit facility of approximately $22 million
and we may not achieve compliance with the Debt Service Coverage
Ratio requirements which begin June 30, 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 December 31, 2010, the
outstanding principal amount of the Arvest Credit Facility was
$22,396,935. 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 during 2010.
Commencing with the calendar quarter ending June 30, 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. As of December 31, 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, but do not anticipate being in compliance by
June 30, 2011. If we are unsuccessful in fully executing
these strategies, there is no assurance that Arvest Bank will
waive or further delay the requirement. Arvest Bank has agreed
to waive the Debt Service Coverage Ratio and the Minimum Net
Worth covenants through December 31, 2011 if we pay to
Arvest Bank the greater of $3 million or one-third of the
proceeds of this offering, plus the principal and interest due
for the remainder of 2011, plus, if we raise over
$15 million in proceeds from this transaction, we will need
to deposit into an escrow account the amount required to make
principal and interest payments to Arvest Bank from
January 1 to June 30, 2012.
If an event of 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 certain of our current
and former executive officer and our largest stockholder 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, from funds previously raised from equity and
debt financings and from funds generated from the sale of the
assets of ApothecaryRx. 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
December 31, 2010 of approximately $22 million to fund
the acquisitions of our existing sleep centers. The outstanding
principal amounts under the Arvest Bank 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.
At December 31, 2010, we had total liabilities of
approximately $28.5 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 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.
10
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.
11
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 March 1, 2011,
16 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 years ended December 31, 2010, 2009 and 2008, we
were wholly or partially reimbursed by third-party plans for
approximately 94%, 96% and 99%, respectively of our revenue from
sleep diagnostic services and product sales. The sleep
diagnostic 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 years
ended December 31, 2010, 2009 and 2008, 16%, 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. The reimbursement process for these third-party
payors 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 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
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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 Fisher and Paykel Healthcare, which supplied
approximately 39% and 44% of our sleep supplies in the years
ended December 31, 2010 and 2008, respectively. In the
fiscal year ended December 31, 2009, our largest sleep
product supplier was Resmed, which supplied approximately 37% 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.
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
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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.
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
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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 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
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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.
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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 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
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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 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.
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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 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
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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 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.
20
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 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 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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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.
We
identified a material weakness in the design and operation of
our internal controls over financial reporting.
During the sale of substantially all of the assets of
ApothecaryRx, we incurred significant charges related to the
accounts receivable and inventory balances at ApothecaryRx. In
addition, we noted additional control
21
deficiencies that in aggregate with the material special
charges incurred at our subsidiary, ApothecaryRx, have caused us
to conclude that we have a material weakness in our internal
control over financial reporting.
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.
Although the accounts receivable trends and the inventory
physical counts related to ApothecaryRx throughout prior periods
did not generate unusual results or cause us to question the
validity of the accounts receivable or inventory balances, we
feel that the significant charges recorded as a result of
adjusting the inventory and accounts receivable amounts to their
net realizable value subsequent to the sale of the ApothecaryRx
represent a material weakness in our internal controls over
financial reporting.
Since the operations of ApothecaryRx were sold, no remediation
efforts are needed relating to those specific control
deficiencies. However, we are evaluating the circumstances and
potential changes to entity wide controls to address the other
identified control deficiencies.
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 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 and other intangible assets acquired pursuant to our
acquisitions of sleep centers may become further impaired and
require additional write-downs and the recognition of additional
substantial impairment expense.
At December 31, 2010, we had approximately
$13.0 million and $2.4 million in goodwill and other
intangible assets, respectively, 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. Based on our
(i) assessment of current and expected future economic
conditions, (ii) trends, strategies and forecasted cash
flows at each business unit and (iii) assumptions similar
to those that market participants would make in valuing our
business units, we determined that the carrying value of
goodwill related to our sleep centers located in Oklahoma,
Nevada and Texas exceeded their fair value. In addition, we
determined the carrying value of our intangible assets
associated with Eastern and certain other intangibles exceeded
their fair value. Accordingly, we recorded a noncash impairment
charge, in December 2010, of $7.5 million and
$3.2 million, respectively, on goodwill and other
intangible assets. In the event that this goodwill or other
intangible assets are determined to be further 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
If the
trading price of our common stock remains below $1 per share or
if we fail to maintain any of the other required listing
standards, our common stock could be delisted from the NASDAQ
Capital Market.
We must meet NASDAQs continuing listing requirements in
order for our common stock to remain listed on the NASDAQ
Capital Market. The listing criteria we must meet include, but
are not limited to, a minimum bid price for our common stock of
$1.00 per share. Failure to meet NASDAQs continued listing
criteria may result in the delisting of our common stock on the
NASDAQ Capital Market.
22
On February 4, 2011, we received a notice from NASDAQ
stating that the minimum bid price of our common stock had been
below $1.00 per share for 30 consecutive business days and that
we were therefore not in compliance with the minimum bid price
requirement for continued listing on The NASDAQ Capital Market
set forth in Listing Rule 5550(a)(2). The notice indicated
that we had been granted 180 calendar days, or until
August 3, 2011, to regain compliance.
If we decide to implement a reverse stock split, the split must
be complete no later than ten business days prior to
August 3, 2011 in order to regain compliance. On
February 1, 2011, we received shareholder approval for an
amendment to our certificate of incorporation in order to effect
a reverse stock split in one of 5 ratios, namely 1 for 2, 3, 4,
5 or 6. Our board of directors must take additional action to
implement this reverse stock split. We intend to implement a
stock split in connection with this offering. Our board is not
required to implement the reverse stock split in connection with
this offering or otherwise.
A delisting from the NASDAQ Capital Market would make the
trading market for our common stock less liquid, and would also
make us ineligible to use
Form S-3
to register the sale of shares of our common stock or to
register the resale of our securities held by certain of our
security holders with the SEC, thereby making it more difficult
and expensive for us to register our common stock or other
securities and raise additional capital.
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 41.8%
of our outstanding common stock. 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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23
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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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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.
You
will experience immediate and substantial dilution in the net
tangible book value of the shares you purchase in this
offering.
If you purchase shares of our common stock in this offering, you
will experience immediate and substantial dilution, in that the
price you pay will be substantially greater than the net
tangible book value per share of the shares you acquire. This
dilution is due in large part to the fact that our earlier
investors paid substantially less than the public offering price
when they purchased their shares of common stock. Based on an
assumed offering price of $0.75 per share, if you purchase our
common stock in this offering, you will suffer immediate and
substantial dilution of approximately $0.80 per share. If the
underwriters exercise their over-allotment option, or if
outstanding options and warrants to purchase our common stock
are exercised, you will experience additional dilution.
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 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.
25
USE OF
PROCEEDS
We estimate that the net proceeds from this offering will be
approximately $13.3 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 pay approximately $5.5 million
to Arvest Bank including approximately $5.0 million and
$0.5 million in principal and interest, respectively, which
represents amounts due through December 31, 2011 under our
credit facility with Arvest Bank, and up to $1.0 million to
repay a loan to Valiant Investments 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 anticipate 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.
Our loan from Valiant Investments, LLC bears interest at 6% and
matures on August 1, 2011. We used the proceeds of the loan
for working capital purposes. As of March 24, 2011,
$200,000 was outstanding on this loan.
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
DILUTION
Our pro forma net tangible book value as of December 31,
2010 was $(15.2) million, or $(0.53) per share of common
stock. Pro forma net tangible book value per share represents
the amount of our total tangible assets less our total
liabilities, divided by the total number of shares of common
stock outstanding, as of December 31, 2010, after giving
effect to the conversion of each outstanding share of our
preferred stock upon the closing of this offering.
After giving effect to this offering and the receipt of
$13.3 million of estimated net proceeds from this offering,
the pro forma net tangible book value of our common stock as of
December 31, 2010 would have been $(2.5) million, or
$(0.05) per share. This amount represents an immediate increase
in net tangible book value of $0.48 per share to the existing
stockholders and an immediate dilution in net tangible book
value of $0.80 per share to purchasers of our common stock in
this offering. Dilution is determined by subtracting pro forma
net tangible book value per share after this offering from the
amount of cash paid by a new investor for a share of common
stock. The new investors will have paid $0.75 per share even
though the per share value of our assets after subtracting our
liabilities is only $(0.05). The following table illustrates
such dilution:
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Assumed public offering price per share
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$
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0.75
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Historical net tangible book value per share as of
December 31, 2010
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$
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(0.53
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Increase per share attributable to this offering
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0.48
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Pro forma net tangible book value per share after this offering
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(0.05
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Dilution per share to new investors
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$
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0.80
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If the underwriter exercise its overallotment option in full,
the pro forma net tangible book value per share after the
offering would be $(0.3) million, or $(0.01) per share.
This amount represents an immediate increase in net tangible
book value of $0.52 per share to the existing stockholders and
an immediate dilution in net tangible book value of $0.76 per
share to purchasers of our common stock in this offering.
27
MARKET
PRICE OF COMMON STOCK AND OTHER RELATED MATTERS
Reverse
Split
On January 26, 2011, our Board of Directors approved a reverse
stock split in one of five ratios, namely 1 for 2, 3, 4, 5 or 6.
On February 1, 2011, we received the consent of a majority of
our shareholders for this reverse stock split. Our Board of
Directors has the authority to determine the exact ratio of the
reverse stock split. We intend to effect the reverse stock split
in connection with the consummation of this offering.
On March 13, 2008, our Board of Directors approved a
reverse split of our common stock at a ratio of
one-for-five
shares. The effective date of this reverse split was set as
April 11, 2008.
Market
Our common stock is listed on the Nasdaq Capital Market
(Nasdaq) under the symbol GRMH. The closing sale
prices reflect inter-dealer prices without adjustment for retail
markups, markdowns or commissions and may not reflect actual
transactions. The following table sets forth the high and low
sale prices of our common stock during the calendar quarters
presented as reported by the Nasdaq and OTC Bulletin Board
for the periods prior to our listing on Nasdaq. Our common stock
started trading on Nasdaq on September 10, 2008. Prices
prior to our reverse split in April 2008 have been adjusted to
give effect to the
one-for-five
reverse stock split.
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High
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Low
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2011
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First Quarter (through March 24, 2011)
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$
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0.90
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$
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0.67
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2010
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Fourth Quarter
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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
|
|
$
|
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 March 24, 2011, the closing price of our common stock as
quoted on Nasdaq was $0.75.
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 March 21, 2011, we had approximately 760 owners of
our common stock shares, which consisted of 80 record owners and
approximately 680 owners in street name.
28
CAPITALIZATION
The following table sets forth, as of December 31, 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 December 31, 2010
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash and cash equivalents(1)
|
|
$
|
1,571,057
|
|
|
$
|
9,362,105
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$
|
23,205,631
|
|
|
$
|
18,280,791
|
|
|
|
|
|
|
|
|
|
|
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; 28,953,611 issued and outstanding
|
|
|
2,895
|
|
|
|
4,895
|
|
Paid-in capital
|
|
|
29,519,387
|
|
|
|
44,517,387
|
|
Accumulated deficit
|
|
|
(29,218,977
|
)
|
|
|
(29,218,977
|
)
|
|
|
|
|
|
|
|
|
|
Total Graymark Healthcare shareholders equity
|
|
|
303,305
|
|
|
|
15,303,305
|
|
Noncontrolling interest
|
|
|
(130,876
|
)
|
|
|
(130,876
|
)
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
172,429
|
|
|
$
|
15,172,429
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization
|
|
$
|
24,949,117
|
|
|
$
|
42,815,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cash and cash equivalents from discontinued operations
of $692,261. |
29
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 years ending December 31, 2007 and
2008 and the balance sheet data as of December 31, 2006,
2007 and 2008 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, 2009 and 2010
and balance sheet data as of December 31, 2009 and 2010
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, independent registered public accounting firm. 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 historical results on a pro forma basis adjusted for our
acquisitions of Somni and Eastern for the years ended
December 31, 2008 and 2009 have been derived from our
unaudited consolidated financial statements that have been
incorporated by reference into this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
Unaudited
|
|
|
|
Actual for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
to
|
|
|
Actual For Years Ended
|
|
|
Years Ended
|
|
|
|
December 31
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
9,553,230
|
|
|
$
|
15,292,164
|
|
|
$
|
17,571,539
|
|
|
$
|
22,764,089
|
|
|
$
|
27,441,366
|
|
|
$
|
25,846,789
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
|
|
|
|
|
3,633,929
|
|
|
|
5,779,918
|
|
|
|
5,522,932
|
|
|
|
7,144,066
|
|
|
|
9,959,992
|
|
|
|
8,283,306
|
|
Selling, general and administrative
|
|
|
|
|
|
|
3,398,931
|
|
|
|
7,726,693
|
|
|
|
13,593,655
|
|
|
|
17,277,322
|
|
|
|
13,381,041
|
|
|
|
17,695,312
|
|
Bad debt expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,768,699
|
|
|
|
1,763,736
|
|
|
|
|
|
|
|
3,768,699
|
|
Impairment of goodwill and Intangible assets
|
|
|
|
|
|
|
204,000
|
|
|
|
|
|
|
|
|
|
|
|
10,751,997
|
|
|
|
|
|
|
|
|
|
Impairment of fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
762,224
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
313,874
|
|
|
|
598,627
|
|
|
|
1,074,132
|
|
|
|
1,337,990
|
|
|
|
1,160,562
|
|
|
|
1,469,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,550,734
|
|
|
|
14,105,238
|
|
|
|
23,959,418
|
|
|
|
39,037,335
|
|
|
|
24,501,595
|
|
|
|
31,216,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
|
|
|
|
(935,874
|
)
|
|
|
(696,181
|
)
|
|
|
(952,724
|
)
|
|
|
(1,433,395
|
)
|
|
|
(857,396
|
)
|
|
|
(1,108,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
|
|
|
|
1,066,622
|
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(17,706,641
|
)
|
|
|
2,082,375
|
|
|
|
(6,447,845
|
)
|
Benefit (provision) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166,795
|
)
|
|
|
(636,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
|
|
|
|
1,066,622
|
|
|
|
490,745
|
|
|
|
(7,340,603
|
)
|
|
|
(17,873,436
|
)
|
|
|
1,445,723
|
|
|
|
(6,447,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes
|
|
|
(269,444
|
)
|
|
|
(5,558,289
|
)
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
(1,416,083
|
)
|
|
|
806,623
|
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
(269,444
|
)
|
|
|
(4,491,667
|
)
|
|
|
1,297,368
|
|
|
|
(5,341,702
|
)
|
|
|
(19,289,519
|
)
|
|
|
2,252,346
|
|
|
|
(4,478,944
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
|
664,862
|
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
(153,513
|
)
|
|
|
552,970
|
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) attributable to Graymark Healthcare
|
|
$
|
(269,444
|
)
|
|
$
|
(5,156,529
|
)
|
|
$
|
744,398
|
|
|
$
|
(5,187,896
|
)
|
|
$
|
(19,136,006
|
)
|
|
$
|
1,699,376
|
|
|
$
|
(4,325,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
Unaudited
|
|
|
|
Actual for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
to
|
|
|
Actual For Years Ended
|
|
|
Years Ended
|
|
|
|
December 31
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
Net earnings per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to
Graymark Healthcare
|
|
$
|
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.22
|
)
|
Net income (loss) from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.27
|
)
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
20,400,000
|
|
|
|
20,404,905
|
|
|
|
25,885,628
|
|
|
|
28,414,508
|
|
|
|
28,983,358
|
|
|
|
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
|
|
|
|
28,983,358
|
|
|
|
26,855,636
|
|
|
|
28,942,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary consolidated balance sheet data as of
December 31, 2006, 2007, 2008, 2009 and 2010 is presented
in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
|
|
|
$
|
958,982
|
|
|
$
|
13,728,534
|
|
|
$
|
1,890,606
|
|
|
$
|
1,571,057
|
|
Working capital
|
|
|
|
|
|
|
(10,354,661
|
)
|
|
|
22,342,608
|
|
|
|
11,274,221
|
|
|
|
(20,504,546
|
)
|
Total assets from discontinued operations
|
|
|
8,894,582
|
|
|
|
21,583,680
|
|
|
|
39,944,929
|
|
|
|
37,399,351
|
|
|
|
3,886,845
|
|
Total assets
|
|
|
8,894,582
|
|
|
|
41,132,637
|
|
|
|
81,333,630
|
|
|
|
76,085,946
|
|
|
|
28,692,552
|
|
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
|
|
|
|
23,205,631
|
|
Total liabilities from discontinued operations
|
|
|
9,163,026
|
|
|
|
10,078,598
|
|
|
|
38,409,854
|
|
|
|
31,584,726
|
|
|
|
2,015,277
|
|
Accumulated deficit
|
|
|
(269,444
|
)
|
|
|
(5,425,973
|
)
|
|
|
(4,681,575
|
)
|
|
|
(9,869,471
|
)
|
|
|
(29,218,977
|
)
|
Total stockholders (deficit) equity(2)
|
|
|
(268,444
|
)
|
|
|
2,492,798
|
|
|
|
22,543,561
|
|
|
|
19,295,699
|
|
|
|
172,429
|
|
|
|
|
(1) |
|
Includes cash and cash equivalents from discontinued operations
of $692,261 and is also included in total assets from
discontinued operations. |
|
|
|
(2) |
|
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 solutions for
patients suffering from sleep disorders.
We provide diagnostic sleep testing services and care management
solutions, or SMS, for people with chronic sleep disorders. In
addition, we provide therapy services (delivery and set up of
CPAP equipment together with training related to the operation
and maintenance of CPAP equipment) and the sale of related
disposable supplies and components used to maintain the CPAP
equipment. 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 CPAP devices via titration testing. We sell
CPAP devices and disposable supplies to patients who have tested
positive for sleep apnea and have had their positive airway
pressure determined.
There are non-controlling interests held in some of the
Companys testing facilities, typically by physicians
located in the geographical area being served by the diagnostic
sleep testing facility.
As of December 31, 2010, we had an accumulated deficit of
approximately $29.2 million and reported a net loss of
approximately $19.1 for the year then ending. We used
approximately $2.4 million in cash to fund our operating
activities from continuing operations during the year ending
December 31, 2010. Furthermore, we have a working capital
deficit of approximately $20.5 million as of
December 31, 2010. We are required to make a
$3 million principal payment to Arvest Bank by
June 30, 2011 and we are currently not in compliance with
certain covenants required by our lending agreement with Arvest
Bank.
In March 2011, we entered into a loan agreement which provides
us up to $1 million. The loan will be advanced through a
series of draws which are subject to our compliance with certain
covenants at the time of each requested draw. In the event that
we are unable to obtain debt or equity financing or we are
unable to obtain such financing on terms and conditions
acceptable to us, we may have to cease or severely curtail our
operations. This uncertainty raises substantial doubt regarding
our ability to continue as a going concern. Historically, we
have been able to raise the capital necessary to fund our
operations and growth. Our consolidated financial statements do
not include any adjustments that might be necessary if we are
unable to continue as a going concern.
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 operated 18
retail pharmacies 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
38
sale of ApothecaryRxs assets, the remaining assets, and
liabilities, results of operations and cash flows of
ApothecaryRx have been classified as discontinued operations for
financial statement reporting purposes.
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 notes 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 used $22.0 million of the
proceeds to pay-down our senior credit facility. In addition, we
are required to pay an additional $3.0 million towards the
outstanding balance related to our senior credit facility by
June 30, 2011. We are currently in discussions with our
senior lender regarding this payment and our compliance with
required financial covenants.
Generally, in December 2011 (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 will be released in May 2012 (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 the
six-month period after the purchase does not maintain a certain
level of the average daily prescription sales (the
Retention Rate Earnout).
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 sought monetary
damages. On October 13, 2010, a stipulated preliminary
injunction was issued in our favor. On December 6, 2010, we
settled the non-competition related 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 comprising the long-term care pharmacy
business and certain other assets to certain of the defendants.
We also agreed to revoke the preliminary injunction in return
the defendants agreed to non-competition arrangements acceptable
to the Buyer.
Business
Operations Evaluation and Reengineering
After the disposition of our pharmacy business, we began an
ongoing evaluation of our sleep related business operations in
order to:
|
|
|
|
|
generate significant organic revenue growth;
|
|
|
|
|
|
expand operating margins;
|
|
|
|
|
|
improve and accelerate cash flow; and
|
|
|
|
|
|
increase net income and shareholder value.
|
Significant Organic Revenue Growth. Management
believes that we can achieve significant organic revenue growth
by pursuing the following initiatives:
Independent Sleep Care Centers.
Set specific volume goals by month in 2011 for each of our
facilities. We are designing and implementing an incentive pay
structure for our sales force to reward them for achieving and
39
surpassing the volume goals. Furthermore, we will enhance our
existing monitoring process to enable management to follow
volume by location on a daily, weekly and monthly basis to
facilitate meeting our volume goals.
We are evaluating and will subsequently reengineer our
scheduling process in order to schedule patients faster,
minimize no shows and last minute cancellations, maximize
operating efficiencies by improving tech to patient ratio and
maximizing the use of our existing capacity. We feel our
reengineered process will increase the rate at which we convert
positively diagnosed sleep study patients to therapy services
and increase the rate at which we convert therapy service
patients to re-supply patients which builds our recurring
revenue patient base.
Hospital Sleep Diagnostic Program Management
Agreements. We continue to identify new
hospital-based sleep labs and execute management agreements with
the facilities that have existing diagnostic sleep operations.
We believe that working with facilities that have existing
operations ensures that the agreements will be immediately
accretive to our earnings. We have set specific volume goals by
month in 2011 for each of our management agreements for 2011. We
are designing and implementing an incentive pay structure for
our sales force to reward them for achieving and surpassing
volume goals.
In addition, we plan to make joint presentations with hospital
administration to hospitals physician staff delineating
the benefits of the diagnosis and treatment of sleep disorders
particularly obstructive sleep apnea. We believe this will
increase the rate at which we convert positively diagnosed sleep
study patients to therapy services and increase the rate at
which we convert therapy service patients to re-supply patients
which builds our recurring revenue patient base.
Expand Operating Margins, Increase Net Income and Enhance
Shareholder Value. Management believes that we
can achieve expansion of our operating margins, improved net
income and increased shareholder value by pursuing the following
initiatives:
Evaluate, minimize and leverage our existing corporate and
support services. We plan to evaluate and right
size our finance, billing, scheduling, human resources,
re-supply service, sales and marketing departments in terms of
structure, staffing requirements, facilities operated and
information system integration. We will also evaluate and
reengineer our purchasing function to ensure that we are paying
the best prices available for our medical and business supplies
and services.
We plan to consider entering into outsourcing partnerships for
certain functions (re-supply fulfillment and shipping, group
purchasing organization).
Improve and Accelerate Cash Flow. Management
believes that we can achieve improved and accelerated cash flow
by pursuing the following initiatives:
Network Migration. During 2011, we will
complete our migration from an
out-of-network
provider to an
in-network
provider in all locations where it makes sense from a cost
benefit analysis perspective. We believe that we will more than
offset the lower allowable amounts offered to
in-network
providers by, lowering our cost to collect, lowering our bad
debt write-offs and accelerating our payment timeframes by being
in-network.
Additionally, we believe that by lowering patient out of pocket
costs by being
in-network
and we will also be able to increase the volume of patients
serviced at our independent sleep care centers.
Reengineer Scheduling and Billing
Functions. We will evaluate and will subsequently
reengineer our scheduling and billing functions to reduce the
time between when our service or supplies are provided and when
we receive payment for those services and supplies (the
billing cycle). This will be accomplished by enhancing our
scheduling process to ensure that all required documentation is
gathered prior to services being rendered or supplies being
shipped thereby reducing significantly the number of claims that
have to be reworked by the billing department prior to initial
billing or after denial by the payor. We will also review and
update our policy related to the payment of patient deductible
and
40
coinsurance amounts prior to services being rendered or
supplies being shipped in order to significantly condense
the billing cycle and reduce our bad debt write-offs.
Acquisitions
Growth Strategy
We plan to grow our business via organic growth related to our
Independent Sleep Care Centers, Hospital Sleep Diagnostic
Programs (both increased volumes related to existing management
agreements and the execution of new management agreements),
therapy services and recurring re-supply fulfillment.
Acquisitions and the opening of new facilities will also be an
integral part of our growth strategy going forward. We will seek
to acquire business operations that can be tucked into our
existing operations as well as additional independent sleep care
centers. We will also seek acquisition opportunities related to
therapy service and re-supply business operations. We expect all
acquisitions to be accretive to our earnings and fully
integrated within ninety (90) days of closing.
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
since are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
Business
|
|
Purchase
|
|
|
Financed by
|
|
Acquisition Date
|
|
Acquired(1)
|
|
Price
|
|
|
Seller
|
|
|
Sleep Management Solutions:
|
|
|
|
|
|
|
|
|
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., Avastra Easter
Sleep Centers and Nocturna Sleep Center, LLC, which were entity
purchases. |
Acquisition
Goodwill
In connection with the acquisitions during 2009, our SMS
operating segment recorded goodwill of $3,911,109 and intangible
assets of $5,446,000. 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).
Goodwill and other indefinite-lived assets are not amortized,
but are subject to impairment reviews annually, or more frequent
if necessary. We are required to evaluate the carrying value of
goodwill during the fourth quarter of each year and between
annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value of the related
operating unit below its carrying amount. These circumstances
may include without limitation
|
|
|
|
|
a significant adverse change in legal factors or in business
climate,
|
|
|
|
|
|
unanticipated competition, or
|
|
|
|
|
|
an adverse action or assessment by a regulator.
|
41
In evaluating whether goodwill is impaired, we must compare the
fair value of the operating unit to which the goodwill is
assigned to the operating units carrying amount, including
goodwill. The fair value of the operating unit will be estimated
using a combination of the income, or discounted cash flows,
approach and the market approach that utilize comparable
companies data. If the carrying amount of the operating unit
(i.e., sleep center) exceeds its fair value, then the
amount of the impairment loss must be measured. The impairment
loss would be calculated by comparing the implied fair value of
an operating unit to its carrying amount. In calculating the
implied fair value of the operating unit goodwill, the fair
value of the operating unit will be allocated to all of the
other assets and liabilities of that operating unit based on
their fair values. The excess of the fair value of an operating
unit over the amount assigned to its other assets and
liabilities will be the implied fair value of goodwill. An
impairment loss will be recognized when the carrying amount of
goodwill exceeds its implied fair value.
Based on our (i) assessment of current and expected future
economic conditions, (ii) trends, strategies and forecasted
cash flows at each business unit and (iii) assumptions
similar to those that market participants would make in valuing
our business units, we determined that the carrying value of
goodwill related to our sleep centers located in Oklahoma,
Nevada and Texas exceeded their fair value. In addition, we
determined the carrying value our intangible assets associated
with Eastern and certain other intangibles exceeded their fair
value. Accordingly, we recorded a noncash impairment charge, in
December 2010, of $7.5 million and $3.2 million,
respectively, on goodwill and other intangible assets. Our
evaluation of goodwill and indefinite lived intangible assets
completed during December 2009 resulted in no impairment losses.
Operating
Statistics:
The following table summarizes our locations as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Number of Locations
|
|
Location Type
|
|
2010
|
|
|
2009
|
|
|
Sleep centers
|
|
|
23
|
|
|
|
28
|
|
Managed sleep centers
|
|
|
70
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
93
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes unit sales and other operating
statistics for the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Sleep studies performed
|
|
|
18,435
|
|
|
|
13,371
|
|
CPAP set ups performed
|
|
|
3,031
|
|
|
|
1,927
|
|
42
Results
of Operations
The following table sets forth selected results of our
operations for the years ended December 31, 2010 and 2009.
The following information was derived and taken from our audited
financial statements appearing elsewhere in this report.
Comparison
of 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net revenues
|
|
$
|
22,764,089
|
|
|
$
|
17,571,539
|
|
Cost of services and sales
|
|
|
7,144,066
|
|
|
|
5,522,932
|
|
Operating expenses
|
|
|
18,615,312
|
|
|
|
14,667,787
|
|
Bad debt expense
|
|
|
1,763,736
|
|
|
|
3,768,699
|
|
Impairment of goodwill and intangible assets
|
|
|
10,751,997
|
|
|
|
|
|
Impairment of fixed assets
|
|
|
762,224
|
|
|
|
|
|
Net other expense
|
|
|
1,433,395
|
|
|
|
952,724
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, before taxes
|
|
|
(17,706,641
|
)
|
|
|
(7,340,603
|
)
|
Provision for income taxes
|
|
|
(166,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of taxes
|
|
|
(17,873,436
|
)
|
|
|
(7,340,603
|
)
|
Income (loss) from discontinued operations, net of taxes
|
|
|
(1,416,083
|
)
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(19,289,519
|
)
|
|
|
(5,341,702
|
)
|
Less: Non-controlling interests
|
|
|
(153,513
|
)
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Graymark Healthcare
|
|
$
|
(19,136,066
|
)
|
|
$
|
(5,187,896
|
)
|
|
|
|
|
|
|
|
|
|
Discussion
of Years Ended December 31, 2010 and 2009
Net revenues increased $5.2 million (a 29.6%
increase) to $22.8 million during 2010 from
$17.6 million in 2009. This increase was primarily due to:
|
|
|
|
|
Revenue from our sleep diagnostic business increased
$3.7 million (21%) compared to 2009. Of this increase,
$6.7 million was due to realizing a full year of operating
revenue from the Somni and Eastern acquisitions completed in
August and September of 2009. This increase was offset by lower
revenues from same location operations of $2.4 million. The
lower same location revenue was driven by lower volumes
($1.5 million), lower rates per study ($0.8 million)
and lower revenue from our clinic services ($0.1 million).
|
|
|
|
|
|
Revenue from our sleep therapy business increased
$1.5 million (37%) compared to 2009. Of this,
$1.4 million was due to realizing a full year of operating
revenue from our Somni acquisition completed in August 2009.
Additionally, revenue from our existing therapy business
increased $0.6 million driven primarily by an increase in
both set-up
and resupply volumes compared to 2009. This was offset by a
favorable adjustment in our reserve for contractual allowances
in 2009 of approximately $0.5 million.
|
Cost of sales and services increased approximately
$1.6 million (a 29.4% increase) to $7.1 million during
2010 from $5.5 million in 2009. This increase was primarily
due to:
|
|
|
|
|
Our sleep diagnostic cost of services increased
$1.9 million and our sleep therapy cost of sales increased
$0.4 million due to realizing a full year of cost of sales
and services from our Somni acquisition which was completed in
August 2009.
|
|
|
|
|
|
Cost of services in our existing diagnostic business decreased
$0.9 million due to the lower volume of sleep studies
compared to 2009.
|
43
|
|
|
|
|
Cost of sales in our existing sleep therapy business increased
$0.2 million due to the growth in that business compared to
2009.
|
Cost of sales and services as a percent of net revenues was 31%
during 2010 and 2009.
Operating expenses increased $3.9 million (a 26.9%
increase) during 2010, compared with 2009. Operating expenses at
our sleep management operations increased $3.4 million due
primarily to the acquisitions of Somni and Eastern in August and
September 2009 which resulted in increased operating expenses of
$4.0 million. Operating expenses in our existing sleep
diagnostic and therapy operations decreased approximately
$0.6 million compared to 2009. The decrease in operating
expenses in our existing sleep operations was due to cost
reduction initiatives and synergies realized from the
integration of Somni and Eastern. Overhead incurred at the
parent-company level, which includes our public-company costs,
increased approximately $0.5 million primarily due to
increased professional fees incurred in conjunction with due
diligence performed on a potential acquisition target.
Bad debt expense decreased approximately
$2.0 million (a 53% decrease) during 2010 compared with
2009. During the second quarter of 2009, we completed our
quarterly analysis of the 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. 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 bad debt expenses in
2009 by $2,648,207. The decrease in bad debt expense resulting
from the change in accounting estimate in 2009 was offset by
approximately $0.2 million of increases in bad debt expense
in 2010 related operating Somni and Eastern for a full year in
2010 compared to 3 to 4 months of operations in 2009. The
remaining change is attributable to bad debt experience at our
existing sleep center locations.
Impairment of goodwill and intangible assets
during the fourth quarter of 2010, we completed our annual
impairment review of goodwill and other intangible assets. Based
on our (i) assessment of current and expected future
economic conditions, (ii) trends, strategies and forecasted
cash flows at each business unit and (iii) assumptions
similar to those that market participants would make in valuing
our business units, we determined that the carrying value of
goodwill related to our sleep centers located in Oklahoma,
Nevada and Texas exceeded their fair value. In addition, we
determined the carrying value our intangible assets associated
with Eastern and certain other intangibles exceeded their fair
value. Accordingly, we recorded a noncash impairment charge, in
December 2010, of $7.5 million and $3.2 million,
respectively, on goodwill and other intangible assets. Our
evaluation of goodwill and indefinite lived intangible assets
completed during December 2009 resulted in no impairment losses.
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
$0.5 million during 2010 compared with 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. In addition, we have
discontinued operations related to our discontinued
44
internet sales division and discontinued film operations. The
results of ApothecaryRx and our other discontinued operations
for the years ended December 31, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenues
|
|
$
|
79,038,856
|
|
|
$
|
89,669,301
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes ApothecaryRx
|
|
$
|
(324,092
|
)
|
|
$
|
1,985,109
|
|
Income (loss) before taxes other
|
|
|
(220,258
|
)
|
|
|
6,896
|
|
Income tax (provision)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued operations, net of
tax
|
|
|
(544,350
|
)
|
|
|
1,992,005
|
|
Special (charges) incurred on sale
|
|
|
(6,516,613
|
)
|
|
|
|
|
Gain recorded on sale
|
|
|
5,644,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(1,416,083
|
)
|
|
$
|
1,992,005
|
|
|
|
|
|
|
|
|
|
|
Net revenues and income from operations for ApothecaryRx
decreased $10.6 million and $2.5 million,
respectively, during 2010 compared with 2009. The decrease in
earnings is primarily due to not operating all stores for a
full-year in 2010 as a result of the sale of ApothecaryRx. This
accounted for $9.7 million of the decrease in revenues. The
decrease in same store earnings was primarily due to a continued
shift to generic drugs which have a lower average price per
prescription compared to branded drugs.
During 2010, we recorded a special charge of approximately
$6.7 million related to certain estimated costs resulting
from the ApothecaryRx Sale. The components of the special charge
are as follows:
|
|
|
|
|
Loss on liquidation of inventory
|
|
$
|
2,041,051
|
|
Bad debt expense on remaining accounts receivable
|
|
|
3,003,190
|
|
Lease termination costs
|
|
|
859,580
|
|
Severance and payroll costs
|
|
|
493,303
|
|
Equipment removal and lease termination costs
|
|
|
119,489
|
|
|
|
|
|
|
Total charge
|
|
$
|
6,516,613
|
|
|
|
|
|
|
The charges noted above were incurred as a result of the
following:
|
|
|
|
|
We did not sell certain of the front-end merchandise and
private-label and other over the counter drugs as part of the
ApothecaryRx Sale. The loss on liquidation of inventory
represents the loss on items that have been liquidated and the
write-down of remaining inventory to expected liquidated values.
|
|
|
|
|
|
We have recorded a reserve for substantially all outstanding
accounts receivable that have not been collected as of
January 31, 2011. Historically, we collected accounts
receivable within 30 days. After the ApothecaryRx sale, we
have seen a significant delay from third-party payers. For
example, as of March 15, 2011 the State of Illinois owed us
approximately $0.7 million. The payment on this receivable
has been delayed due to underfunding of the States
Medicaid program. We will continue collection efforts on the
balances owed and any future receipts will be recorded as a bad
debt recovery in the period collected.
|
|
|
|
|
|
We incurred certain severance and payroll costs, lease
termination costs and equipment removal costs related to the
pharmacy locations which were not assumed by the buyer.
|
Additional charges may be recorded in future periods dependent
upon the final resolution of the items listed above.
Noncontrolling interests were allocated approximately
$154,000 of net losses during 2010 and 2009. Noncontrolling
interests are the equity ownership interests in our SDC Holdings
subsidiaries that are not wholly-owned.
45
Net income (loss) attributable to Graymark
Healthcare. Our operations resulted in a net loss
of approximately $18.9 million (83% of approximately
$22.8 million in net revenues) during 2010, compared to a
net loss of approximately $5.2 million (30% of
approximately $17.8 million in net revenues) during 2009.
Reduction
in Cost Base.
As a result of our disposition of ApothecaryRxs
independent retail pharmacy business, we began a company-wide
strategic review of our operations. We have begun to implement
changes in operations as discussed above. We believe that we can
achieve a material reduction in our cost base as a result of
these changes and begin to generate positive cash flow on a
prospective basis by September 30, 2011.
In addition, we incurred costs in 2010 which we do not believe
that will be part of our normal operations for 2011 based on the
restructuring or our operations. We expect that this
restructuring of our operations will be competed by
September 30, 2011. We incurred costs of $454,000 in 2010
which we believe we will not incur in 2011 due to salary
reductions ($56,000), and reduced staffing in marketing
($80,000), accounting ($59,000), billing ($90,000), and human
resources ($127,000) departments. We incurred compensation costs
of $359,000 in 2010 for our President ($112,000), Chief
Operating Officer ($165,000) and Vice President of Operations
($81,000) each of these positions has been eliminated during
2010 or 2011. We also incurred costs of $789,000 in 2010 which
we do not expect to incur in 2011 due to changes in staffing at
our sleep centers ($423,000) and physician staffing ($367,000).
We incurred $618,000 in costs in 2010 which we do not believe we
will incur in 2011 due to combining two Oklahoma sleep centers
($120,000), facility move expenses ($21,000) and renegotiation
of leases ($477,000). We also incurred IT infrastructure
investments of $56,000 which we do not expect in 2011. We
incurred consulting and professional service costs of $299,000
in 2010 associated with negotiating and obtaining contracts with
various third party payors ($121,000), fees for tax services
related to prior years ($140,000) upgrading our accounting
systems ($9,000) and performing the intangible asset valuation
related to the Somni and East acquisitions ($28,000). We also
incurred an expense related to a reserve for incurred but not
yet billed expenses of $60,000.
In 2010, we incurred costs relating to the ApothecaryRx
transaction and other potential transactions which were not
consummated. These transactional costs included approximately
$688,000 for legal, accounting and other professional fees.
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 December 31,
2010 totaled approximately $1.6 million. As of
December 31, 2010, we had a working capital deficit of
approximately $20.5 million.
Our operating activities during 2010 used net cash of
approximately $3.9 million compared to operating activities
in 2009 that used net cash of approximately $2.7 million.
The increase in cash flows used by operating activities was
primarily attributable to an increase in the cash used from the
operating activities of our discontinued operations. Operating
activities from our continuing operations improved by
$1.0 million during 2010 compared to 2009. During 2010, our
operating activities from continuing operations included a net
loss from continuing operations of $17.7 million which was
increased by the losses from discontinued operations of
$1.4 million and offset by impairment charges of
$11.7 million, depreciation and amortization of
$1.3 million, bad debt expense of $1.8 million, and
stock-based compensation of $0.4 million.
Our investing activities during 2010 provided net cash of
approximately $28.8 million compared to 2009 during which
we used approximately $10.2 million for investing
activities. The increase in the cash provided by investing
activities was attributable to the proceeds from the sale of
ApothecaryRx assets which produced $29.2 million.
Our financing activities during 2010 used net cash of
$25.2 million compared to 2009 during which financing
activities provided $3.0 million. The increase in the cash
used by financing activities is primarily due to increased debt
payments. During 2010, we made debt payments of
$25.2 million compared to debt
46
payments of $2.4 million in 2009. The debt payments made
in 2010 include $22.5 million that were made from the
proceeds of the sale of the assets of ApothecaryRx which is
further discussed below.
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 operated 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. Of the
proceeds, $22 million 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
June 30, 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 purchase does not maintain percentage certain
level of average daily prescription sales (the Retention
Rate Earnout).
As of December 31, 2010, we had an accumulated deficit of
approximately $29.1 million and reported a net loss of
approximately $19.0 for the year then ending. We used
approximately $2.4 million in cash from operating
activities of continuing operations during the year ending
December 31, 2010. Furthermore, we have a working capital
deficit of approximately $21 million as of
December 31, 2010. We are required to make a
$3 million principal payment to Arvest Bank by
June 30, 2011 and we are currently not in compliance with
certain covenants required by our lending agreement with Arvest
Bank.
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 December 31, 2010, the
47
outstanding principal amount of the Arvest Credit Facility was
$22,396,935. See -Loan Agreement below for a
descriptions of a recent consent granted by Arvest in March 2011.
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 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 contractual 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
|
|
|
|
|
|
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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
48
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 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 Financial Covenants. As of
December 31, 2010, our Debt Service Coverage Ratio is less
than 1.25 to 1 and we do not meet the Minimum Net Worth
requirement. Arvest Bank has waived the Debt Service Coverage
Ratio and Minimum Net Worth requirements through June 30,
2011 assuming we make a $3 million principal payment by
June 30, 2011. We expect to raise the funds necessary to
make the principal payment through additional equity or debt
financing. There is no assurance that Arvest Bank will waive
Debt Service Coverage Ratio and Minimum Net Worth requirements
beyond June 30, 2011. Due to the non-compliance of these
waivers and the associated contingent nature of achieving
compliance before June 30, 2011, the associated debt has
been classified as current on our consolidated balance sheet.
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
49
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 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.
Loan
Agreement
On March 16, 2011, we entered into a Loan Agreement with
Valiant Investments, LLC, an entity owned and controlled by Roy
T. Oliver one of our controlling shareholders, of up to
$1 million. We intend to use the loan to fund our working
capital needs. The loan will be disbursed in amounts requested
by the Company subject to the lenders consent and
compliance with other conditions contained in the Loan
Agreement. The loan matures on August 1, 2011. Interest
accrues at a rate of 6% and default interest accrues at a rate
of 15%. We are also required to pay 1% of each advance on the
loan as a loan fee. This loan is unsecured and subordinated to
our Arvest Bank facility. The Loan Agreement also contains
restrictions on our ability to take action without the consent
of the lender, these include: (i) acquisitions of other
businesses, (ii) the sale of all or substantially all of
our assets, (iii) the issuance of common stock or
convertible securities unless the proceeds are to be used to
repay the loan in full.
On March 11, 2011, we received the consent of Arvest to
obtain this loan and requirements for payments of interest and
principal on this loan and Arvest will waive the debt service
coverage ratio and minimum net worth covenants through
December 31, 2011 on the following conditions:
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On or before June 30, 2011, Graymark will pay to Arvest the
greater of $3 million or one-third of the proceeds of any
public equity offering;
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On or before June 30, 2011, Graymark will pay Arvest a fee
equal to 0.25% of the outstanding loan balance as of
June 30, 2011;
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If Graymark is not in compliance with the debt service coverage
ratio and minimum net worth covenants on December 31, 2011,
Graymark will pay Arvest a fee equal to 0.50% of the then
outstanding balance of the loan (which does not cure any default
in such covenants);
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On June 30, 2011, Graymark will prepay all interest and
principal payments due to Arvest between July 1, 2011 and
December 31, 2011;
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On June 30, 2011, if Graymark has received at least
$15 million in proceeds from a public equity offering then
Graymark will escrow with Arvest all principal and interest
payments due to Arvest between January 1, 2010 and
June 30, 2012;
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Graymark may not repay any amounts on the $1 million loan
from Valiant Investments before August 1, 2011 except that
Graymark may repay such loan in full if Graymark has received
more than $10 million in proceeds from a public equity
offering and if Graymark has received less than $10 million
from a public equity offering then Graymark will be permitted to
make interest payments only on such loan; and
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The $1 million loan will be subordinated to Arvests
credit facility in all respects.
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50
Financial
Commitments
We do not have any material capital commitments during the next
12 months, but we do have contractual commitments of
approximately $26.0 million for payments on our
indebtedness and for operating lease payments. Included in this
amount is $23.7 million related to the classification of
our credit facility as current for financial statement purposes.
Although we have not entered into any definitive arrangements
for obtaining additional capital resources, either through
long-term lending arrangements or equity offering, we continue
to explore various capital resource alternatives to replace our
long-term bank indebtedness.
Our future commitments under contractual obligations by expected
maturity date at December 31, 2010 are as follows:
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< 1 year
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1-3 years
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3-5 years
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> 5 years
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Total
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Long-term debt
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$
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24,149,167
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$
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437,025
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$
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26,894
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$
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$
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24,613,086
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Operating leases
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1,597,411
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2,389,424
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1,282,358
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2,489,158
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7,758,351
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Operating leases, discontinued operations
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269,454
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423,313
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67,101
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759,868
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$
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26,016,032
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$
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3,249,762
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$
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1,376,353
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$
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2,489,158
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$
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33,131,305
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Off-Balance
Sheet Arrangements
We had no material off-balance sheet arrangements (as defined in
Item 303(a) (4) of
Regulation S-K)
as of December 31, 2010 and 2009.
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 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. For the business acquired from somniCare, Inc.
and somniTech, Inc. (collectively referred to as
Somni) in 2009, 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 the net revenue for the Somni business since the
date of the acquisition and do not anticipate any future changes
to this process. In our historic business, the business has been
predominantly
out-of-network
and as a result, we have not had contract rates to use for
determining net revenue for a majority of our payors. For this
portion of the 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 the analysis. In the 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. The 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
consistently used this process to estimate net revenue at the
time of service other than a change in fiscal
51
2009 to using 12 months of payment history. Prior to that
time, we used nine months of payment history for its 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. During the
fourth quarter of 2010, we migrated much of our historic sleep
diagnostic business to an
in-network
position. As a result, commencing with the fourth quarter of
2010, the revenue from our historic sleep diagnostic business
was determined using the process utilized in the Somni business.
For our therapy business, we expect to transition to this same
process in the first or second quarter of 2011. This change in
process and assumptions 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.
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 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 subsequent 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.
Cost of Services and Sales Cost of services
includes technician labor required to perform sleep diagnostics,
fees associated with interpreting the results of the sleep study
and disposable supplies used in providing sleep diagnostics.
Cost of sales includes the acquisition cost of sleep therapy
products sold. Costs of services are recorded in the time period
the related service is provided. Cost of sales is 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 private insurance carriers, Medicare and Medicaid 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 has historically been
out-of-network
with several payors, which means we do not have defined
contracted reimbursement rates with these payors. For this
reason, our systems reported revenue at a higher gross billed
amount, which we adjusted to an expected net amount based on
historic payments. This process continues in our historic sleep
therapy business, but was changed in the fourth quarter of 2010
for our historic sleep
52
diagnostic business. As a result, the reserve for contractual
allowance has been reduced as our systems now report a larger
portion of our business at estimated net contract rates. As we
continue to move more of our business to
in-network
contracting, the level of reserve related to contractual
allowances is expected 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 to 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
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 for the years ended
December 31, 2010 and 2009 follows:
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2010
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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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51.25
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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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52.14
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55 to 60
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99.76
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100 to 105
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53
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 December 31, 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.
Material
Weakness
Internal
Controls over Financial Reporting
During the sale of substantially all of the assets of
ApothecaryRx, we incurred significant charges related to the
accounts receivable and inventory balances at ApothecaryRx. In
addition, we noted additional control deficiencies that in
aggregate with the material special charges incurred at our
subsidiary ApothecaryRx have caused us to conclude that we have
a material weakness in our internal control over financial
reporting.
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.
Although the accounts receivable trends and the inventory
physical counts related to the ApothecaryRx throughout prior
periods did not generate unusual results or cause us to question
the validity of the accounts to receivable or inventory
balances, we feel that the significant charges recorded as a
result of adjusting the inventory and accounts receivable
amounts to their net realizable value subsequent to the sale of
the ApothecaryRx represent a material weakness in our internal
controls over financial reporting.
Since the operations of ApothecaryRx were sold, no remediation
efforts are needed related to those specific control
deficiencies. However, we are evaluating the circumstances and
potential changes to entity wide controls to address the other
identified control deficiencies.
54
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 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 July 2010, the FASB issued changes to the required
disclosures about the nature of the credit risk in an
entitys financing receivables, how that risk is
incorporated into the allowance for credit losses, and the
reasons for any changes in the allowance. Disclosure is required
to be disaggregated at the level at which an entity calculates
its allowance for credit losses. This change is effective us
beginning June 30, 2011. The adoption of this accounting
standard is not expected to have a material impact on our
financial position, results of operations, cash flows and
disclosures.
In December 2010, the FASB issued changes as to when a company
should perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. The
amendments in this change modify Step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it
is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that an impairment
may exist. The qualitative factors are consistent with the
existing guidance, which requires that goodwill of a reporting
unit be tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying
amount. The amendments in this change are effective for fiscal
years, and interim periods within those years, beginning after
December 15, 2010. Early adoption is not permitted. This
change is effective for us beginning January 1, 2011 and is
not expected to have a material impact on our financial
position, results of operations, cash flows and disclosures.
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In December 2010, the FASB issued changes to the disclosure
requirements for business combinations. The changes require a
public entity to disclose pro forma information for business
combinations that occurred in the current reporting period. The
disclosures include pro forma revenue and earnings of the
combined business combinations that occurred during the year had
been as of the beginning of the annual reporting period. If
comparative financial statements are presented, the pro forma
revenue and earnings of the combined entity for the comparable
prior reporting period should be reported as though the
acquisition date for all business combinations that occurred
during the current year had been as of the beginning of the
comparable prior annual reporting period. The amendments in this
update are effective prospectively for business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after
December 15, 2010 effective for us beginning
January 1, 2011. The adoption of this accounting standard
is not expected to have a material impact on our financial
position, results of operations, cash flows and disclosures.
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.
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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 2010 Frost & Sullivan report
estimated the U.S. sleep diagnostic market was
$1.4 billion in 2008, and that it will grow to
$3.4 billion by 2015 for a combined annual growth rate of
14.3%.
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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 26 independent sleep care centers and
72 hospital sleep diagnostic programs, out of a total we
estimate includes 4,000 sleep clinics in the United States,
illustrates the
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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
58
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
Historically, 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 and
hospital sleep diagnostic centers 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 expect to focus
our acquisition opportunities on large
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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. When we acquire additional hospital sleep diagnostic
centers we enter into a management contract to manage the
existing sleep center without any purchase price or capital
outlay on our part which allows us to increase our therapy
business through additional patient referrals without adding to
our cost base. 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 several 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 26 and the total number of hospital sleep diagnostic
programs to 72.
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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
December 31, 2010, our SMS business completed the following
acquisitions:
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Acquisition
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Business
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Date
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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.
63
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
64
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. During 2010, our
sleep center payor mix, as a percentage of total sleep center
revenues, was approximately 78% commercial insurance, 16%
Medicaid/Medicare and 6% 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
65
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
66
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
67
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
68
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. Prior to the sale, we
owned and operated 18 retail pharmacies located in Colorado,
Illinois, Missouri, Minnesota, and Oklahoma.
Employees
As of March 22, 2011, we had 177 full-time and 29
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 $7,000.
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.
69
As of March 25, 2011, we operated 26 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 March 25,
2011, 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
|
|
Nov. 2015
|
Oklahoma City
|
|
Sep. 2014
|
Norman
|
|
Jan. 2014
|
Texas:
|
|
|
Southlake Keller
|
|
Jul. 2013
|
McKinney
|
|
Sep. 2011
|
Granbury
|
|
Apr. 2011
|
Bedford
|
|
Dec. 2013
|
Waco
|
|
Jan. 2018
|
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
|
|
Nov. 2013
|
Nebraska
|
|
|
Omaha
|
|
Jan. 2013
|
New York
|
|
|
Williamsville
|
|
May 2014
|
Buffalo
|
|
Month-to-month
|
Dunkirk
|
|
Mar. 2012
|
Lockport
|
|
May 2011
|
West Seneca
|
|
Jan. 2012
|
Buffalo
|
|
Jul. 2011
|
Tonawanda
|
|
Jul. 2017
|
Florida
|
|
|
Coral Springs
|
|
Oct. 2013
|
70
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.
71
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
|
|
|
40
|
|
|
Chief Executive Officer and Chairman of the Board
of Directors
|
Edward M. Carriero, Jr.
|
|
|
55
|
|
|
Chief Financial Officer
|
Grant Christianson
|
|
|
41
|
|
|
Chief Accounting Officer
|
Scott Mueller(1)(2)(3)
|
|
|
40
|
|
|
Director
|
Joseph Harroz, Jr.
|
|
|
44
|
|
|
Director
|
S. Edward Dakil, M.D.(1)(2)(3)
|
|
|
55
|
|
|
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, Corporate Development 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.
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
72
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.
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.
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 LLC. The Board determined
that each
73
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 LLC
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
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 has 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, 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.
74
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, 2010 and 2009.
Summary
Compensation Table
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Name 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
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Total
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Stanton Nelson(3)
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2010
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$
|
|
|
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$
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300,000
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|
|
$
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113,000
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|
|
$
|
|
|
|
$
|
|
|
|
$
|
413,000
|
|
Chief Executive Officer
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|
|
2009
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
244,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
244,000
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Edward M. Carriero, Jr.(4)
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|
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2010
|
|
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$
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46,032
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|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,584
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|
|
$
|
|
|
|
$
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74,616
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|
Chief Financial Officer
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2009
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Grant A. Christianson(5)
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2010
|
|
|
$
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170,000
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|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
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170,000
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Chief Accounting Officer
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2009
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$
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145,000
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|
|
$
|
|
|
|
$
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329,400
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|
|
$
|
|
|
|
$
|
|
|
|
$
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474,400
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Joseph Harroz, Jr.(3)(6)
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2010
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$
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93,750
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$
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140,000
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|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
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233,750
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Former President
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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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$
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510,000
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|
|
$
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|
|
|
$
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|
|
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$
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760,000
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Lewis P. Zeidner(7)
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2010
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$
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235,000
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$
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|
|
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$
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|
|
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$
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42,190
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$
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|
|
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$
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277,190
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Former Chief Operating Officer
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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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$
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89,123
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|
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$
|
|
|
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$
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296,815
|
|
|
|
|
(1) |
|
The value of Stock Awards is the grant date fair value
multiplied by the number of shares awarded computed in
accordance with FASB Topic 718. 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 14 to the Companys consolidated
financial statements for the year ended December 31, 2010
beginning on
page F-26
of this prospectus. |
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(2) |
|
The value of Option Awards is the aggregate grant date fair
value computed in accordance with FASB Topic 718. 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 14 to the Companys
consolidated financial statements for the year ended
December 31, 2010 beginning on
page F-26
of this prospectus. |
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(3) |
|
On March 25, 2010, our Board of Directors granted
Mr. Nelson and Mr. Harroz a bonus award of $300,000
and $140,000, respectively, payable upon successful completion
by the Company of a Significant Transaction before
December 31, 2010. For purposes of the bonus award, a
Significant Transaction means a transaction deemed significant
by the Board of Directors, including a financing transaction,
whether equity or debt, or a merger and acquisition event. On
December 29, 2010, the Board of Directors concluded that
the sale of substantially all of the assets of ApothecaryRx to
Walgreens was a Significant Transaction and concluded that the
bonus awards for Mr. Nelson and Mr. Harroz had been
earned. The Board specified that the awards would be paid in
cash or stock by March 15, 2011 subject to review of the
Companys cash position by the Board. On March 2,
2011, the Board of Directors reviewed the cash position and
determined that due to the expectation of a going concern
qualification to its financial statements as of and for the year
ended December 31, 2010, the bonuses to Mr. Nelson and
Mr. Harroz would be paid promptly after the Company
completed a financing allowing the Company to have sufficient
working capital to operate in the ordinary course of business
after payment of such bonuses. |
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(4) |
|
Mr. Carriero became our Senior Vice President, Corporate
Development, on October 7, 2010, and was subsequently
appointed as our Chief Financial Officer on November 15,
2010. |
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(5) |
|
Mr. Christianson served as our Chief Financial Officer from
April 30, 2009 until November 15, 2010 and currently
serves as our Chief Accounting Officer. |
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(6) |
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Mr. Harroz resigned as our president effective
June 30, 2010. Mr. Harroz currently serves as one of
our directors. |
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(7) |
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Mr. Zeidner was terminated on February 17, 2011. |
75
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth information related to equity
awards held by our named executive officers as of
December 31, 2010. During 2010, no options to purchase our
common stock were exercised by the named executive officers.
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Outstanding Equity Awards at December 31, 2010
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Option Awards
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Stock Awards
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Number of
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Common Stock
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Option
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Option
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Number of
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Market Value of
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Underlying Options
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Exercise
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Expiration
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Shares of Stock
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Shares of Stock
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Name
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Exercisable
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Unexercisable
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Price
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|
Date
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That Have Not Vested
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That Have Not Vested(1)
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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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Edward M. Carriero, Jr.
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50,000
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$
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1.19
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10/7/2015
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Grant A. Christianson
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|
|
|
|
|
|
|
|
|
|
|
|
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90,000
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(2)
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$
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65,700
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Lewis P. Zeidner(5)
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|
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66,666
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|
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33,334
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(3)
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$
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2.30
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|
|
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9/30/2014
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|
|
|
|
|
|
|
|
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25,000
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|
|
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50,000
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(4)
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$
|
1.17
|
|
|
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9/30/2015
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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, 2010 was $0.73. |
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(2) |
|
45,000, 30,000 and 15,000 are scheduled to vest on
August 1, 2011, 2012 and 2013, respectively. |
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(3) |
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33,333 shares vested on October 13, 2009 and
October 1, 2010 and 33,334 shares are scheduled to
vest on October 1, 2011. |
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(4) |
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25,000 shares vested on October 1, 2010 and
25,000 shares are scheduled to vest on October 1, 2011
and October 1, 2012. |
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(5) |
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Mr. Zeidner was terminated on February 17, 2011. |
On March 25, 2010, we granted a stock award to our Chief
Executive Officer, Stanton Nelson, in the amount of
100,000 shares. The stock grant award was valued at $1.13
per share, which was the closing sale price of our common stock
on The NASDAQ Capital Market on the grant date. Because
Mr. Nelsons stock award vested immediately, it is not
reflected in the above table.
Employment
Arrangements with Current Executive Officers
We have employment agreements with each of Edward M.
Carriero, Jr., Grant Christianson, Stanton Nelson. As of
December 31, 2010, we had an agreement with Lewis P.
Zeidner who was terminated effective February 17, 2011. The
material terms of these employment agreements, as amended to
date, are summarized below.
Edward M. Carriero, Jr. On
October 7, 2010, we entered into an employment agreement
with Mr. Carriero to serve as our Senior Vice President,
Corporate Development. On November 15, 2010,
Mr. Carriero was appointed our Chief Financial Officer.
Mr. Carrieros agreement is for an initial three-year
term, automatically extends for additional three year periods,
unless earlier terminated in accordance with its terms or we
notify him within 120 days of termination date that the
term will not be extended. The employment of Mr. Carriero
is full time and may be terminated by him or the Company with or
without cause. Mr. Carriero is to receive a base salary of
$200,000. Mr. Carriero was also granted a fully vested
stock option on his first day of employment (the Grant
Date) exercisable for 50,000 shares of the
Companys common stock at the closing price on the Grant
Date. Mr. Carriero is eligible for participation in any and
all benefit programs that the Company 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 us without cause or by him 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.
In addition, Mr. Carriero agreed not to, directly or
indirectly, seek to persuade any employee, contractor, customer,
vendor or subcontractor of the
76
Company, or any affiliated entity to discontinue, breach or
terminate his or her employment, contract, or relationship with
the Company, or such affiliated entity or to become employed or
engaged in a business or activities likely to be competitive
with the Company, or any affiliated entity, for a period of two
years following his termination.
Grant Christianson. On October 19, 2010,
we entered in to an amended and restated employment agreement
with Mr. Christianson to serve as our Chief Accounting
Officer. Mr. Christianson previously served as our Chief
Financial Officer. Mr. Christiansons agreement
terminates on July 31, 2012 unless the Company otherwise
elects to extend the term of the agreement. The employment of
Mr. Christianson is full time and may be terminated by him
or the Company with or without cause. Mr. Christianson is
to receive a base salary of $180,000, and he is eligible for
participation in any and all benefit programs that the Company
makes available to its employees, including health, dental and
life insurance to the extent that he meets applicable
eligibility requirements. Mr. Christianson is entitled to
four weeks paid vacation yearly. Upon termination of
Mr. Christiansons employment by us without cause or
by him with good reason, Mr. Christianson 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. In addition,
Mr. Christianson agreed not to persuade any employee of the
Company, or any affiliated entity or any person who was an
employee of the Company or any affiliated entity, to discontinue
his or her status or employment with the Company, or such
affiliated entity or to become employed in a business or
activities likely to be competitive with the Company, or any
affiliated entity, for a period of one year following his
termination.
Stanton Nelson. Effective October 1,
2009, we entered into an employment agreement with
Mr. Nelson to serve as either or both the Chief Executive
Officer and Chairman of the Board of Directors of the Company.
Mr. Nelsons agreement is for an initial three-year
term, and automatically extends for additional three year
periods, unless earlier terminated in accordance with its terms
or we notify him within 120 days of termination date that
the term will not be extended. The employment of Mr. Nelson
is full time and may be terminated by him or the Company with or
without cause. Except to a limited extent and as expressly
permitted by our Board of Directors, Mr. Nelson is
prohibited from serving as an officer or director of a
publicly-held company or owning an interest in a company that
interferes with his full-time employment or that is engaged in a
business activity similar to our business. Mr. Nelson is to
receive a base salary of $1.00, and is eligible to be paid bonus
compensation, if any, as determined in the absolute discretion
of the Company. In addition, upon execution of the employment
agreement, and on October 1 of each year during the term of his
employment agreement, Mr. Nelson shall be granted a fully
vested stock award of 100,000 shares of the Companys
common stock pursuant to the Companys 2008 Long-term
Incentive Plan. Mr. Nelson is eligible for participation in
any and all benefit programs that the Company makes available to
its employees, including health, dental and life insurance to
the extent that he meets applicable eligibility requirements.
Mr. Nelson is entitled to four weeks paid vacation yearly.
We have the right to terminate Mr. Nelsons agreement
without cause for any reason, and Mr. Nelson may terminate
his employment for cause, in either case on at least
30-day
advance notice. In the event of termination without cause by us
or termination by Mr. Nelson for cause, Mr. Nelson is
entitled to a 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, issued in 24 equal installments, plus
eligibility in health and certain other benefit plans for
12 months from termination.
In addition, Mr. Nelson agreed that, during the
24 months following termination of his employment, he will:
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Not 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 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
|
77
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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.
|
Lewis P. Zeidner. Mr. Zeidner was
terminated on February 17, 2011. Effective October 1,
2009, we and our wholly owned subsidiary, ApothecaryRx, LLC,
entered into an employment agreement with Mr. Zeidner to
serve as President or CEO of ApothecaryRx, LLC and Chief
Operating Officer of Graymark. Mr. Zeidners agreement
was for an initial three-year term, and automatically extended
for additional three year periods, unless earlier terminated in
accordance with its terms or we notified him within
120 days of termination date that the term will not be
extended. The employment of Mr. Zeidner was full time and
could be terminated by him or the Company with or without cause.
Except to a limited extent and as expressly permitted by our
Board of Directors, Mr. Zeidner was prohibited from serving
as an officer or director of a publicly-held company or owning
an interest in a company that interferes with his full-time
employment or that is engaged in a business activity similar to
our business. Mr. Zeidner was to receive a base salary of
$235,000, and was eligible to be paid bonus compensation, if
any, as determined in the absolute discretion of the Company. In
addition, upon execution of the employment agreement,
Mr. Zeidner received a stock option to purchase
100,000 shares of our common stock pursuant to the
Companys 2008 Long-term Incentive Plan. In addition, on
September 30, 2010 Mr. Zeidner was, and on
September 30, 2011, Mr. Zeidner will be awarded stock
options to purchase 75,000 shares of our common stock
pursuant to the Companys 2008 Long-term Incentive Plan
provided he is still employed by us. Also, in the event our
former subsidiary, ApothecaryRx, LLC, achieves 90% of the
budgeted net income during the
12-month
period ending September 2010 and 2011, Mr. Zeidner would
have been entitled to a stock option award exercisable for the
purchase of 25,000 common stock shares. In the event
ApothecaryRx was 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 all of these 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.
Mr. Zeidner is eligible for participation in any and all
benefit programs that the Company makes available to its
employees, including health, dental and life insurance to the
extent that he meets applicable eligibility requirements.
Mr. Zeidner is entitled to four weeks paid vacation yearly.
We had the right to terminate Mr. Zeidners agreement
without cause for any reason, and Mr. Zeidner had the right
to terminate his employment for cause, in either case on at
least 30-day
advance notice. In the event of termination without cause by us
or termination by Mr. Zeidner for cause, Mr. Zeidner
would be entitled to $235,000, payable over 12 months, plus
eligibility in health and certain other benefit plans for
12 months from termination.
In addition, Mr. Zeidner agreed that, during the
24 months following termination of his employment, he will:
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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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78
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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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Termination
Agreement with Former Executive Officer
On March 25, 2010, Mr. Harroz announced his
resignation from Graymark effective June 30, 2010, and we
entered into an agreement to amend his existing employment
agreement and to specify certain terms of his resignation. Under
the agreement, Mr. Harroz worked on a half-time basis for
one-half his current base salary, or $125,000, from
April 1, 2010 through June 30, 2010. In addition, the
Board approved the accelerated vesting on 112,500 shares of
restricted stock as of March 25, 2010, with
37,500 shares to be forfeited upon termination of
employment on June 30, 2010. The Board also granted
Mr. Harroz a bonus award of up to $140,000 payable upon
successful completion by the Company of a Significant
Transaction, as described above in the Summary Compensation
Table.
Compensation
of Directors
We do not compensate directors for serving on our Board of
Directors or attending meetings of our Board of Directors or any
of its committees. However, it is anticipated that restricted
stock grants and stock options will be granted to our directors
on terms to be determined by our Board of Directors. We
reimburse our directors for travel and
out-of-pocket
expenses in connection with their attendance at meetings of our
Board of Directors. During 2010, each of our non-employee
directors received fully-vested stock awards covering
15,000 shares. All compensation received by our directors
who are also executive officers is included in our Summary
Compensation Table. See Executive Compensation
Summary Compensation Table for compensation received by
directors who are also our employees.
Director
Compensation Table
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All Other
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Name
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Stock Awards
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Option Awards
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Compensation
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Total
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Scott R. Mueller
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$
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18,000
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$
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$
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$
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18,000
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Steven L. List
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$
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18,000
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$
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$
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$
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18,000
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S. Edward Dakil, M.D.
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$
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18,000
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$
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$
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$
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18,000
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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
79
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.
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.
80
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.
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.
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for a breach of the directors duty of loyalty to us or our
shareholders;
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for acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law;
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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
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for any transaction from which the director derived an improper
personal benefit.
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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.
81
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
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 $15,000,000.
82
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
The following table sets forth as of December 31, 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.
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Number of
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Securities to be
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Number of
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Issued Upon
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Weighted-Average
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Securities Remaining
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Exercise of Outstanding
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Exercise Price of
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Available for Future
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Options, Warrants
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Outstanding Options,
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Issuance Under Equity
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Plan Category
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and Rights
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Warrants and Rights
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Compensation Plans
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Equity compensation plans approved by security holders:
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2008 Long-Term Incentive Plan
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229,398
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$
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1.71
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2,640,602
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2003 Stock Option Plan
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16,000
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$
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3.75
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2003 Non-Employee Stock Option Plan
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16,000
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$
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3.75
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Equity compensation plans not approved by security
holders:
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Warrants issued to SXJE, LLC
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100,000
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$
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2.50
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Warrants issued to ViewTrade Financial and its assigns
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100,270
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$
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2.05
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Options issued to employees
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60,000
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$
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3.75
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Options issued to directors
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60,000
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$
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3.75
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Total
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581,668
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$
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2.44
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2,640,602
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83
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 $7,000 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
December 31, 2010, we have approximately $640,000 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 $110,000 at December 31, 2010. 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 January 10,
2011, we entered into a time sharing agreement with
R.T. Oliver Investments (RTO), one of our
greater than 5% shareholders pursuant to which we leased on a
time-sharing basis one aircraft from RTO for the period from
January 1, 2011 through December 31, 2012. On
November 1, 2008, we entered into two time sharing
agreements with RTO, pursuant to which we licensed, on a
time-sharing basis, two aircraft owned by RTO, for the period
from November 1, 2008 to December 31, 2010. We are
required to pay RTO 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 RTO, $24,715 and
$23,964 for flights conducted under these agreements. We did not
use the planes in 2010.
84
Loan Agreement. On March 16, 2011, we
entered into a Loan Agreement with Valiant Investments, LLC, an
entity owned and controlled by Roy T. Oliver, one of our greater
than 5% shareholders. The loan is for up to $1 million
which we may draw upon from time to time for working capital.
Interest accrues at 6% and the loan matures on August 1,
2011. This loan is subordinate to our Arvest Bank credit
facility.
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.
85
PRINCIPAL
STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our capital stock, as of January 31, 2011, by
the following:
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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;
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each of our current directors;
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each of our named executive officers; and
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all current directors and executive officers as a group.
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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 January 31, 2011 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.
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Common Stock Beneficial Ownership(1)
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Shares
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Rights To
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Total
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Ownership
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Name (and Address) of Beneficial Owner
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Owned
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Acquire
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Shares
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Percent(2)
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Roy T. Oliver(3)
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7,028,992
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7,028,992
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24.3
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%
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101 N. Robinson, Ste. 900
Oklahoma City, Oklahoma 73102
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Lewis P. Zeidner
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3,493,000
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91,666
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3,584,666
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12.3
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%
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5400 Union Terrace Lane North
Plymouth, Minnesota 55442
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Stanton Nelson(4)
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2,733,072
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19,000
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2,752,072
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9.5
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%
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Dalea Partners LP(5)
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1,703,969
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1,703,969
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5.9
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%
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4801 Gaillardia Parkway, Suite 350
Oklahoma City, Oklahoma 73142
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William R. Oliver
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|
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1,657,608
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|
|
|
15,000
|
|
|
|
1,672,608
|
|
|
|
5.8
|
%
|
101 N. Robinson, Ste. 900
Oklahoma City, OK 73072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. Mark Moore(6)
|
|
|
1,609,212
|
|
|
|
|
|
|
|
1,609,212
|
|
|
|
5.6
|
%
|
101 N. Robinson, Ste. 800
Oklahoma City, Oklahoma 73102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLW Securities LLC(7)
|
|
|
1,564,842
|
|
|
|
|
|
|
|
1,564,842
|
|
|
|
5.4
|
%
|
PO Box 54525
Oklahoma City, Oklahoma 73154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Harroz, Jr.(4)
|
|
|
241,392
|
|
|
|
15,000
|
|
|
|
256,392
|
|
|
|
*
|
|
Scott R. Mueller(4)
|
|
|
134,181
|
|
|
|
15,000
|
|
|
|
149,181
|
|
|
|
*
|
|
S. Edward Dakil, M.D.(4)
|
|
|
133,571
|
|
|
|
15,000
|
|
|
|
148,571
|
|
|
|
*
|
|
Grant A. Christianson(4)(8)
|
|
|
119,048
|
|
|
|
|
|
|
|
119,048
|
|
|
|
*
|
|
Edward M. Carriero, Jr.(4)
|
|
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
*
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Beneficial Ownership(1)
|
|
|
Shares
|
|
Rights To
|
|
Total
|
|
Ownership
|
Name (and Address) of Beneficial Owner
|
|
Owned
|
|
Acquire
|
|
Shares
|
|
Percent(2)
|
|
Steven List(4)
|
|
|
40,000
|
|
|
|
|
|
|
|
40,000
|
|
|
|
*
|
|
Executive Officers and Directors as a group (8 individuals)
|
|
|
6,894,264
|
|
|
|
205,666
|
|
|
|
7,099,930
|
|
|
|
24.3
|
%
|
|
|
|
(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) |
|
Includes (i) 200,000 shares held by Mr. Roy T.
Oliver and (ii) 6,828,992 shares held by Oliver
Company Holdings, LLC. Mr. Oliver has voting and investment
power over the shares held by Oliver Company Holdings, LLC, and
therefore may be deemed to beneficially own such shares. |
|
|
|
(4) |
|
The named person is an executive officer or a director or both. |
|
|
|
(5) |
|
Mr. Malone Mitchell has voting and investment power over
the shares held by Dalea Partners, LP. |
|
|
|
(6) |
|
Includes (i) 484,500 shares held by MTV Investments,
LP, (ii) 1,104,112 shares held by Black Oak II, LLC,
and (iii) 20,600 shares held by Black Oak Investments,
LLC. Mr. P. Mark Moore has voting and investment power over
the shares held by these entities, and may therefore be deemed
to beneficially own such shares. |
|
|
|
(7) |
|
Mr. Tom Ward has voting and investment power over the
shares held by TLW Securities LLC. |
|
|
|
(8) |
|
Includes 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, 2012
and 15,000 shares on August 1, 2013. |
87
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.
Reverse
Stock Split
On January 26, 2011, our Board of Directors approved a
reverse stock split in one of five ratios, namely 1 for 2, 3, 4,
5 or 6. On February 1, 2011, we received the consent of a
majority of our shareholders for this reverse stock split. We
intend to effect the reverse stock split in connection with the
consummation of this offering.
Common
Stock
The rights, privileges, disabilities and restrictions in general
of the holders of our outstanding shares of the common stock are
as follows:
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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;
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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
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|
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.
88
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.
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.
89
UNDERWRITING
We have entered into an underwriting agreement with Roth Capital
Partners, LLC in connection with this offering. Subject to
certain conditions, we have agreed to sell to the underwriter,
and the underwriter has agreed to purchase from us
20,000,000 shares of our common stock.
The underwriting agreement provides that the obligation of the
underwriter to purchase the shares offered hereby is subject to
certain conditions and that the underwriter is obligated to
purchase all of the shares of common stock offered hereby if any
of the shares are purchased.
If the underwriter sells more than 20,000,000 shares in
offering, the underwriter has an option for 30 days to buy
up to an additional 3,000,000 shares from us at the public
offering price, less the underwriting commissions and discounts,
to cover these sales.
The underwriter proposes to offer to the public the shares of
common stock purchased pursuant to the underwriting agreement at
the public offering price on the cover page of this prospectus.
After the shares are released for sale to the public, the
underwriter may change the offering price and other selling
terms at various times.
In connection with the sale of the shares of common stock to be
purchased by the underwriter, the underwriter will be deemed to
have received compensation in the form of underwriting
commissions and discounts.
We have also agreed to reimburse Roth Capital Partners, LLC for
certain usual and customary out-of-pocket expenses incurred by
it in connection with the offering, including reasonable legal
fees, up to an aggregate of $125,000 in connection with this
offering.
The following table summarizes the compensation and estimated
expenses we will pay in connection with this offering:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Total
|
|
|
|
Without over-
|
|
|
With over-
|
|
|
Without over-
|
|
|
With over-
|
|
|
|
allotment
|
|
|
allotment
|
|
|
allotment
|
|
|
allotment
|
|
|
Underwriting discounts and commissions paid by us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
We estimate that total expenses payable by us in connection with
this offering, excluding underwriting discounts, will be
approximately $665,000.
We have agreed, subject to certain exceptions, not to offer,
sell, contract to sell or otherwise issue any shares of common
stock or securities exchangeable or convertible into common
stock, without the prior written consent of Roth Capital
Partners, LLC, for a period of 90 days, subject to an
18 day extension under certain circumstances, following the
date of this prospectus. In addition, all of our executive
officers and directors and certain of our greater than 5%
shareholders have entered into a
lock-up
agreement with the underwriter. Under the
lock-up
agreement, subject to certain exceptions, he may not, directly
or indirectly, offer, sell, contract to sell, pledge (other than
in connection with Company financings) or otherwise dispose of
or hedge any common stock or securities convertible into or
exchangeable for shares of common stock, or publicly announce to
do any of the foregoing, without the prior written consent of
Roth Capital Partners, LLC, for a period of 90 days from
the date of this prospectus, subject to an 18 day extension
under certain circumstances. This consent may be given at any
time without public notice.
Pursuant to the underwriting agreement, we have agreed to
indemnify the underwriter against certain liabilities, including
liabilities under the Securities Act, or to contribute to
payments which the underwriter or such other indemnified parties
may be required to make in respect of any such liabilities.
The underwriter and its affiliates have provided, and may in the
future provide, various investment banking, commercial banking
and other financial services for us for which services they have
received, and may receive in the future, customary fees.
90
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act.
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|
|
|
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
|
|
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|
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|
Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
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|
Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. A naked short position occurs if the
underwriters sell more shares than could be covered by the
over-allotment option. This position can only be closed out by
buying shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that
there could be downward pressure on the price of the shares in
the open market after pricing that could adversely affect
investors who purchase in the offering.
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|
Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be discontinued at any time.
This prospectus supplement and the accompanying prospectus may
be made available in electronic format on the Internet sites or
through other online services maintained by the underwriter
participating in the offering or by its affiliates. In those
cases, prospective investors may view offering terms online and
prospective investors may be allowed to place orders online.
Other than the prospectus supplement and the accompanying
prospectus in electronic format, the information on the
underwriters or our website and any information contained
in any other website maintained by the underwriter or by us is
not part of the prospectus supplement, the accompanying
prospectus or the registration statement of which this
prospectus supplement and the accompanying prospectus form a
part, has not been approved
and/or
endorsed by us or the underwriter in its capacity as underwriter
and should not be relied upon by investors.
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.
91
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,
2010 and 2009, and for each of the years in the periods ended
December 31, 2010 and 2009, appearing in this Prospectus
and Registration Statement have been audited by Eide Bailly LLP,
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.
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.
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|
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|
|
Our Annual Report on
Form 10-K
for the year ended December 31, 2009; and
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|
|
|
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
92
(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.
93
GRAYMARK
HEALTHCARE, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
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Page
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F-2
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F-3
|
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F-4
|
|
|
|
|
F-5
|
|
|
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|
F-6
|
|
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|
F-7
|
|
F-1
Report
of Independent Registered Public Accounting Firm
To the Audit Committee, Board of Directors,
and Shareholders of Graymark Healthcare, Inc.
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of
Graymark Healthcare, Inc. (the Company) as of
December 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders equity and cash
flows for each of the years then ended. Graymark Healthcare,
Inc.s management is responsible for these financial
statements. 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 financial statements are
free of material misstatement. 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 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 financial position
of Graymark Healthcare, Inc. as of December 31, 2010 and
2009, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of operations.
As discussed in Note 2 to the consolidated financial
statements, the Company has suffered significant losses from
operations, anticipates additional losses in the next year and
has insufficient working capital as of December 31, 2010 to
fund the anticipated losses. These conditions raise substantial
doubt about the Companys ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Eide Bailly LLP
Greenwood Village, Colorado
March 28, 2011
F-2
GRAYMARK
HEALTHCARE, INC.
As
of December 31, 2010 and 2009
|
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|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
878,796
|
|
|
$
|
1,093,645
|
|
Cash and cash equivalents from discontinued operations
|
|
|
692,261
|
|
|
|
796,961
|
|
Accounts receivable, net of allowances for contractual
adjustments and doubtful accounts of $2,791,906 and $9,772,580,
respectively
|
|
|
2,892,271
|
|
|
|
4,276,628
|
|
Inventories
|
|
|
553,342
|
|
|
|
351,585
|
|
Current assets from discontinued operations
|
|
|
2,093,571
|
|
|
|
15,515,067
|
|
Other current assets
|
|
|
468,486
|
|
|
|
120,388
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,578,727
|
|
|
|
22,154,274
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,870,514
|
|
|
|
5,318,680
|
|
Intangible assets, net
|
|
|
2,400,756
|
|
|
|
5,871,578
|
|
Goodwill
|
|
|
13,007,953
|
|
|
|
20,516,894
|
|
Other assets from discontinued operations
|
|
|
1,101,013
|
|
|
|
21,087,323
|
|
Other assets
|
|
|
733,589
|
|
|
|
1,137,197
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,692,552
|
|
|
$
|
76,085,946
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
942,020
|
|
|
$
|
561,031
|
|
Accrued liabilities
|
|
|
2,357,195
|
|
|
|
1,752,598
|
|
Short-term debt
|
|
|
|
|
|
|
195,816
|
|
Current portion of long-term debt
|
|
|
22,768,781
|
|
|
|
480,201
|
|
Current liabilities from discontinued operations
|
|
|
2,015,277
|
|
|
|
7,890,407
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,083,273
|
|
|
|
10,880,053
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
436,850
|
|
|
|
22,215,875
|
|
Liabilities from discontinued operations
|
|
|
|
|
|
|
23,694,319
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
28,520,123
|
|
|
|
56,790,247
|
|
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; 28,953,611 and 28,989,145 issued and outstanding,
respectively
|
|
|
2,895
|
|
|
|
2,899
|
|
Paid-in capital
|
|
|
29,519,387
|
|
|
|
29,086,750
|
|
Accumulated deficit
|
|
|
(29,218,977
|
)
|
|
|
(9,869,471
|
)
|
|
|
|
|
|
|
|
|
|
Total Graymark Healthcare shareholders equity
|
|
|
303,305
|
|
|
|
19,220,178
|
|
Noncontrolling interest
|
|
|
(130,876
|
)
|
|
|
75,521
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
172,429
|
|
|
|
19,295,699
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
28,692,552
|
|
|
$
|
76,085,946
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-3
GRAYMARK
HEALTHCARE, INC.
For
the Years Ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
17,206,634
|
|
|
$
|
13,529,092
|
|
Product sales
|
|
|
5,557,455
|
|
|
|
4,042,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,764,089
|
|
|
|
17,571,539
|
|
|
|
|
|
|
|
|
|
|
Cost of Services and Sales:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
5,515,380
|
|
|
|
3,806,582
|
|
Cost of sales
|
|
|
1,628,686
|
|
|
|
1,716,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,144,066
|
|
|
|
5,522,932
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
15,620,023
|
|
|
|
12,048,607
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
17,277,322
|
|
|
|
13,593,655
|
|
Bad debt expense
|
|
|
1,763,736
|
|
|
|
3,768,699
|
|
Impairment of goodwill and intangible assets
|
|
|
10,751,997
|
|
|
|
|
|
Impairment of property and equipment
|
|
|
762,224
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,337,990
|
|
|
|
1,074,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,893,269
|
|
|
|
18,436,486
|
|
|
|
|
|
|
|
|
|
|
Other (Expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,223,334
|
)
|
|
|
(906,870
|
)
|
Other expense
|
|
|
(10,061
|
)
|
|
|
(45,854
|
)
|
Impairment of equity investment
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense)
|
|
|
(1,433,395
|
)
|
|
|
(952,724
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before taxes
|
|
|
(17,706,641
|
)
|
|
|
(7,340,603
|
)
|
Provision for income taxes
|
|
|
(166,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
(17,873,436
|
)
|
|
|
(7,340,603
|
)
|
Income (loss) from discontinued operations, net of taxes
|
|
|
(1,416,083
|
)
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(19,289,519
|
)
|
|
|
(5,341,702
|
)
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
(153,513
|
)
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Graymark Healthcare
|
|
$
|
(19,136,006
|
)
|
|
$
|
(5,187,896
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
(0.25
|
)
|
Income from discontinued operations
|
|
|
(0.05
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.66
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
28,983,358
|
|
|
|
28,414,508
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding
|
|
|
28,983,358
|
|
|
|
28,414,508
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-4
GRAYMARK
HEALTHCARE, INC.
For
the Years Ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Balances, January 1, 2009
|
|
|
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 loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009
|
|
|
28,989,145
|
|
|
|
2,899
|
|
|
|
29,086,750
|
|
|
|
(9,869,471
|
)
|
|
|
75,521
|
|
Stock-based compensation
|
|
|
(35,534
|
)
|
|
|
(4
|
)
|
|
|
432,637
|
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,884
|
)
|
Change in accounting method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,500
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,136,006
|
)
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2010
|
|
|
28,953,611
|
|
|
$
|
2,895
|
|
|
$
|
29,519,387
|
|
|
$
|
(29,218,977
|
)
|
|
$
|
(130,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-5
GRAYMARK
HEALTHCARE, INC.
For
the Years Ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,136,006
|
)
|
|
$
|
(5,187,896
|
)
|
Less: Net income (loss) from discontinued operations
|
|
|
(1,416,083
|
)
|
|
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(17,719,923
|
)
|
|
|
(7,186,797
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,337,990
|
|
|
|
1,074,132
|
|
Disposal of retired fixed assets
|
|
|
|
|
|
|
77,916
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(153,513
|
)
|
|
|
(153,806
|
)
|
Stock-based compensation and professional services
|
|
|
432,633
|
|
|
|
605,141
|
|
Bad debt expense
|
|
|
1,763,736
|
|
|
|
3,768,699
|
|
Change in accounting method
|
|
|
(213,500
|
)
|
|
|
|
|
Impairment charges
|
|
|
11,714,221
|
|
|
|
|
|
Changes in assets and liabilities (net of
acquisitions)
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(379,379
|
)
|
|
|
(622,010
|
)
|
Inventories
|
|
|
(201,757
|
)
|
|
|
(78,463
|
)
|
Other assets
|
|
|
55,510
|
|
|
|
(663,771
|
)
|
Accounts payable
|
|
|
380,989
|
|
|
|
(221,768
|
)
|
Accrued liabilities
|
|
|
604,597
|
|
|
|
2,304
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities from continuing
operations
|
|
|
(2,378,396
|
)
|
|
|
(3,398,423
|
)
|
Net cash provided by (used in) operating activities from
discontinued operations
|
|
|
(1,539,932
|
)
|
|
|
723,493
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(3,918,328
|
)
|
|
|
(2,674,930
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Cash received from acquisitions
|
|
|
|
|
|
|
259,163
|
|
Purchase of businesses
|
|
|
|
|
|
|
(9,056,000
|
)
|
Purchase of property and equipment
|
|
|
(548,529
|
)
|
|
|
(1,117,618
|
)
|
Disposal of property and equipment
|
|
|
124,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities from continuing
operations
|
|
|
(424,280
|
)
|
|
|
(9,914,455
|
)
|
Proceeds from sale of assets from discontinued operations
|
|
|
29,289,874
|
|
|
|
|
|
Net other cash (used in) investing activities from discontinued
operations
|
|
|
(50,054
|
)
|
|
|
(263,336
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
28,815,540
|
|
|
|
(10,177,791
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Debt proceeds
|
|
|
28,894
|
|
|
|
5,407,901
|
|
Debt payments
|
|
|
(5,200,411
|
)
|
|
|
(2,393,961
|
)
|
Contributions from noncontrolling interests
|
|
|
|
|
|
|
41,250
|
|
Distributions to noncontrolling interests
|
|
|
(52,884
|
)
|
|
|
(96,551
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities from
continuing operations
|
|
|
(5,224,401
|
)
|
|
|
2,958,639
|
|
Net cash (used in) financing activities from discontinued
operations
|
|
|
(19,992,360
|
)
|
|
|
(3,595,622
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(25,216,761
|
)
|
|
|
(636,983
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(319,549
|
)
|
|
|
(13,489,704
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
1,890,606
|
|
|
|
15,380,310
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
1,571,057
|
|
|
|
1,890,606
|
|
Cash and cash equivalents of discontinued operations at end of
year
|
|
|
692,261
|
|
|
|
796,961
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations at end of year
|
|
$
|
878,796
|
|
|
$
|
1,093,645
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-6
GRAYMARK
HEALTHCARE, INC.
For the
Years Ended December 31, 2010 and 2009
|
|
Note 1
|
Nature of
Business
|
Graymark Healthcare, Inc. (the Company) 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. The Company provides a comprehensive diagnosis
and care management solution for patients suffering from sleep
disorders.
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. The Companys 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 (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. The Company sells CPAP devices and disposable
supplies to patients who have tested positive for sleep apnea
and have had their positive airway pressure determined. There
are noncontrolling interests held in some of the Companys
testing facilities, typically by physicians located in the
geographical area being served by the diagnostic sleep testing
facility.
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
operated 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 ApothecaryRx
assets 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 6 Discontinued
Operations.
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Note 2
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Basis of
Presentation
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As of December 31, 2010, the Company had an accumulated
deficit of approximately $29.2 million and reported a net
loss of approximately $19.1 for the year then ending. The
Company used approximately $2.4 million in cash from
operating activities of continuing operations during the year
ending December 31, 2010. Furthermore, the Company has a
working capital deficit of approximately $20.5 million as
of December 31, 2010. As noted in Note 10
Borrowings, the Company is required to make a $3 million
principal payment to Arvest Bank by June 30, 2011 and is
not in compliance with certain covenants required by its lending
agreement with Arvest Bank.
Management expects to raise approximately $13.3 million in
a public stock offering by the end of April 2011. From the
proceeds of the offering, the Company will be required to pay
the greater of one-third of the proceeds of the equity offering
or $3 million to Arvest Bank. Management believes that the
Company will begin to generate positive cash flow on a
prospective basis by September 30, 2011. In the event that
the Company is unable to obtain debt or equity financing or the
Company is unable to obtain such financing on terms and
conditions acceptable to it, the Company may have to cease or
severely curtail its operations. This uncertainty raises
substantial doubt regarding the Companys ability to
continue as a going concern. Historically, management has been
able to raise the capital necessary to fund the operation and
growth of the Company. The consolidated financial statements do
not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
F-7
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Note 3
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Summary
of Significant Accounting Policies
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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 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 the Company and, accordingly, the
Company bills on behalf of its customers. For the business
acquired from somniCare, Inc. and somniTech, Inc. (collectively
referred to as Somni) in 2009, the Company estimates
the net realizable amount based primarily on the contracted
rates stated in the contracts the Company has with various
payors. The Company has used this method to determine the net
revenue for the Somni business since the date of the acquisition
and does not anticipate any future changes to this process. In
the Companys historic business, the business has been
predominantly
out-of-network
and as a result, the Company has not had contract rates to use
for determining net revenue for a majority of its payors. For
this portion of the business, the Company performs a quarterly
analysis of actual reimbursement from each third party payor for
the most recent
12-months.
The Company conducts this analysis for each of its operating
locations separately to ensure differences in payment rates from
various markets are identified in the analysis. In the analysis,
the Company calculates 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. The 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, the
Company has 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, the Company used nine months of payment history for its
quarterly analysis. Although the impact on the calculation was
negligible, the Company determined a
12-month
review eliminates potential seasonal fluctuations and provides a
broader sample of payments for the calculation. During the
fourth quarter of 2010, the Company migrated much of its
historic sleep diagnostic business to an
in-network
position. As a result, commencing with the fourth quarter of
2010, the revenue from the Companys historic sleep
diagnostic business was determined using the process utilized in
the Somni business. For its therapy business, the Company
expects to transition to this same process in the first or
second quarter of 2011. This change in process and assumptions
for the Companys 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. The Company recognizes
revenue on these sales as payments are earned over the payment
period stipulated by the third-party payor.
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 the
Companys 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 the Company operates, certain
estimates are required to record net revenues and accounts
receivable at their net realizable values at the time products
or services are provided. Inherent in these estimates is the
risk that they will have to be revised or updated as additional
information becomes available, which could have a material
impact on the Companys operating results and cash flows in
subsequent periods. Specifically, the complexity of many
F-8
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 the Companys products and
services. The amount patients are responsible for includes
co-payments, deductibles, and amounts not covered due to the
provider being
out-of-network.
Due to uncertainties surrounding deductible levels and the
number of
out-of-network
patients, the Company is not certain of the full amount of
patient responsibility at the time of service. Starting in 2010,
the Company 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.
During the years ended December 31, 2010 and 2009, the
Companys revenue payer mix:
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2010
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2009
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Managed care organizations
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78
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%
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78
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%
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Medicaid / Medicare
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16
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%
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18
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%
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Private-pay
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6
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%
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4
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%
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Cost of Services and Sales Cost of services
includes technician labor required to perform sleep diagnostics,
fees associated with interpreting the results of the sleep study
and disposable supplies used in providing sleep diagnostics.
Cost of sales includes the acquisition cost of sleep therapy
products sold. Costs of services are recorded in the time period
the related service is provided. Cost of sales is 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.
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 The majority of the
Companys accounts receivable is due from private insurance
carriers, Medicare/Medicaid and other third-party payors, as
well as from patients relating to deductible and coinsurance and
deductible provisions of their health insurance policies.
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 the Companys business has historically been
out-of-network
with several payors, which means the Company does not have
defined contracted reimbursement rates with these payors. For
this reason, the Companys systems reported revenue at a
higher gross billed amount, which the Company adjusted to an
expected net amount based on historic payments. This process
continues in the Companys historic sleep therapy business,
but was changed in the fourth quarter of 2010 for the
Companys historic sleep diagnostic business. As a result,
the reserve for contractual allowance has been reduced as our
systems now report a larger portion of our business at estimated
net contract rates. As the Company continues to move more of its
business to
in-network
contracting, the level of reserve related to contractual
allowances is expected 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 to reflect this longer payment cycle. The
Company has 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.
The Company offers payment plans to patients for amounts due
from them for the sales and services the Company provides. For
patients with a balance of $500 or less, the Company allows a
maximum of six months for the patient to pay the amount due. For
patients with a balance over $500, the Company allows a maximum
of 12 months to pay the full amount due. The minimum
monthly payment amount for both plans is $50 per month.
F-9
Accounts are written-off as bad debt using a specific
identification method. For amounts due from patients, the
Company utilizes 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 diagnostic patients, the Company submits
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 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 the
Companys 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 a collection
agency, the amounts previously written-off are reversed as a
recovery of bad debt. For amounts due from third party payors,
it is the Companys 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.
For the years ended December 31, 2010 and 2009, the amounts
the Company collected in excess of recorded contractual
allowances were $271,195 and $54,600, respectively.
As of December 31, 2010 and 2009, accounts receivable are
reported net of allowances for contractual adjustments and
doubtful accounts as follows:
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2010
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2009
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Allowance for contractual adjustments
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$
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1,511,330
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$
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5,985,269
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Allowance for doubtful accounts
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1,280,576
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3,787,311
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|
|
|
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Total
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$
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2,791,906
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$
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9,772,580
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The activity in the allowances for contractual adjustments and
doubtful accounts for the years ending December 31, 2010
and 2009 follows:
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Contractual
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Doubtful
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Adjustments
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Accounts
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Total
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Balance at December 31, 2008
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$
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11,627,387
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$
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1,350,238
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$
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12,977,625
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Provisions
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35,248,283
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1,120,492
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37,186,644
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Write-offs, net of recoveries
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(40,890,401
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)
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(1,331,626
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)
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(43,039,896
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)
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Change in accounting estimate (see Note 4)
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2,648,207
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2,648,207
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|
|
|
|
|
|
|
|
|
|
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Balance at December 31, 2009
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5,985,269
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|
|
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3,787,311
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|
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9,772,580
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Provisions
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18,502,775
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|
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|
1,763,736
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20,266,511
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Write-offs, net of recoveries
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(22,976,714
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)
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(3,757,580
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)
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(26,734,294
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)
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Change in accounting method (see Note 4)
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|
|
|
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(512,891
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)
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(512,891
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)
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|
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Balance at December 31, 2010
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$
|
1,511,330
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$
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1,280,576
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$
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2,791,906
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F-10
The aging of the Companys accounts receivable, net of
allowances for contractual adjustments and doubtful accounts as
of December 31, 2010 and 2009 follows:
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2010
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2009
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1 to 60 days
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$
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1,890,902
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$
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2,262,937
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61 to 90 days
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282,807
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549,234
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91 to 120 days
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170,435
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609,539
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121 to 180 days
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67,394
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|
|
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244,890
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181 to 360 days
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186,310
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|
|
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433,178
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Greater than 360 days
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294,423
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176,850
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Total
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$
|
2,892,271
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$
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4,276,628
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In addition to the aging of accounts receivable shown above,
management relies on other factors to determine the
collectability of accounts including the status of claims
submitted to third party payors, reason codes for declined
claims and an assessment of the Companys ability to
address the issue and resubmit the claim and whether a patient
is on a payment plan and making payments consistent with that
plan.
Included in accounts receivable are earned but unbilled
receivables of approximately $129,000 and $797,000 as of
December 31, 2010 and 2009, respectively. 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, the Company performs 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 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.
Approximately 19% of the Companys accounts receivable are
from Medicare and Medicaid programs and another 56% 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, 2010
and 2009, the Company had long-term restricted cash of $236,000
included in other assets in the accompanying consolidated
balance sheets. This amount is pledged as collateral to the
Companys senior bank debt and bank line of credit.
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.
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-11
The estimated useful lives of the Companys property and
equipment are as follows:
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Asset Class
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Useful Life
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Equipment
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5 to 7 years
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Software
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3 to 7 years
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Furniture and fixtures
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7 years
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Leasehold improvements
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25 years or remaining lease period, whichever is shorter
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Vehicles
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3 to 5 years
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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 five 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.
Deferred Offering Costs The Company defers as
other assets the direct incremental costs of raising capital
until such time as the offering is completed. At the time of the
completion of the offering, the costs are charged against the
capital raised. Should the offering be terminated, deferred
offering costs are charged to operations during the period in
which the offering is terminated.
Equity Investment in Non-Controlled Entity
The Company accounts for its investments in a non-controlled
entity 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.
See Note 9 Other Assets for additional
information.
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 2010 and 2009, included in continuing operations, was
$356,789 and $109,218, respectively. Advertising expense for
2010 and 2009, included in discontinued operations, was $244,052
and $255,903, respectively.
Acquisition Costs Acquisition costs are
charged directly to expense when incurred.
Legal Issues For asserted claims and
assessments, liabilities are recorded when an unfavorable
outcome of a matter is deemed to be probable and the loss is
reasonably estimable. Management determines the likelihood of an
unfavorable outcome based on many factors such as the nature of
the matter, available defenses and case strategy, progress of
the matter, views and opinions of legal counsel and other
advisors, applicability and success of appeals processes, and
the outcome of similar historical matters, among others. Once an
unfavorable outcome is deemed probable, management weighs the
probability of estimated losses, and the most reasonable loss
estimate is recorded. If an unfavorable outcome of a matter is
deemed to be reasonably possible, then the matter is disclosed
and no liability is recorded. With respect to unasserted claims
or assessments, management must first determine that the
probability that an assertion will be made is likely, then, a
determination as to the likelihood of an unfavorable outcome and
the ability to reasonably estimate the potential loss is made.
Legal matters are reviewed on a continuous basis or sooner if
significant changes in matters have occurred to determine if a
change in the likelihood of an unfavorable outcome or the
estimate of a loss is necessary.
F-12
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 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, 2010, 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, 2010, 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.
The dilutive potential common shares on options and warrants are
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:
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|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Stock options and warrants
|
|
|
581,668
|
|
|
|
826,863
|
|
|
|
|
|
|
|
|
|
|
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. There were no cash deposits in excess of
FDIC limits as of December 31, 2010. The amount of cash
deposits as of December 31, 2009 in excess of FDIC limits
was approximately $423,000.
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
F-13
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.
Reclassifications Certain amounts presented
in prior years have been reclassified to conform to the current
years presentation.
Recently
Adopted and Recently Issued Accounting Guidance
Adopted
Guidance
Effective January 1, 2010, the Company 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 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 the
Companys consolidated financial statements.
Effective January 1, 2010, the Company 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 the Companys consolidated
financial statements.
Effective January 1, 2010, the Company 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 the Companys consolidated
financial statements.
Issued
Guidance
In July 2010, the FASB issued changes to the required
disclosures about the nature of the credit risk in an
entitys financing receivables, how that risk is
incorporated into the allowance for credit losses, and the
reasons for any changes in the allowance. Disclosure is required
to be disaggregated at the level at which an entity calculates
its allowance for credit losses. This change is effective for
the Company beginning June 30, 2011. The adoption of this
accounting standard is not expected to have a material impact on
the Companys financial position, results of operations,
cash flows and disclosures.
In December 2010, the FASB issued changes as to when a company
should perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. The
amendments in this change modify Step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it
is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that an impairment
may exist. The qualitative factors are consistent with the
existing guidance, which requires that goodwill of a reporting
unit be tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below
F-14
its carrying amount. The amendments in this change are effective
for fiscal years, and interim periods within those years,
beginning after December 15, 2010. Early adoption is not
permitted. This change is effective for the Company beginning
January 1, 2011 and is not expected to have a material
impact on the Companys financial position, results of
operations, cash flows and disclosures.
In December 2010, the FASB issued changes to the disclosure
requirements for business combinations. The changes require a
public entity to disclose pro forma information for business
combinations that occurred in the current reporting period. The
disclosures include pro forma revenue and earnings of the
combined business combinations that occurred during the year had
been as of the beginning of the annual reporting period. If
comparative financial statements are presented, the pro forma
revenue and earnings of the combined entity for the comparable
prior reporting period should be reported as though the
acquisition date for all business combinations that occurred
during the current year had been as of the beginning of the
comparable prior annual reporting period. The amendments in this
update are effective prospectively for business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after
December 15, 2010 effective for the Company beginning
January 1, 2011. The adoption of this accounting standard
is not expected to have a material impact on the Companys
financial position, results of operations, cash flows and
disclosures.
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 the Company on January 1,
2011. Management has determined that the adoption of these
changes will not have an impact on the Companys
consolidated financial statements, as the Company does not
currently have any such arrangements with its 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 the Company beginning January 1, 2011. Other
than the additional disclosure requirements, management has
determined these changes will not have an impact on the
Companys consolidated financial statements.
|
|
Note 4
|
Change in
Accounting Method and Accounting Estimate
|
On January 1, 2010, the Company elected to change its
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 acquisitions of somniTech, Inc., somniCare, Inc.
and Avastra Eastern Sleep Centers, Inc. in the third quarter of
2009, the Company 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 by the Company.
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.
The Company has 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,
the Company will apply the change in revenue recognition for
rental equipment on a prospective basis. As a result of the
F-15
accounting change, the Companys accumulated deficit
increased $213,500, as of January 1, 2010, from $9,869,471,
as originally reported, to $10,082,971. In addition, the
accounts receivable and the related allowance for doubtful
accounts associated with the outstanding rental equipment were
removed and the cost of outstanding rental equipment was
established as rental inventory as detailed below:
|
|
|
|
|
Accounts receivable
|
|
$
|
796,768
|
|
Allowance for doubtful accounts
|
|
|
(512,891
|
)
|
Less: Rental inventory established
|
|
|
70,377
|
|
|
|
|
|
|
Adjustment to accumulated deficit
|
|
$
|
213,500
|
|
|
|
|
|
|
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 sleep
management business 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
bad debt expense 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.
On August 24, 2009, the Company acquired somniTech, Inc.
and somniCare, Inc. (Somni) for a purchase price of
$5.9 million. On September 14, 2009, the Company
acquired Avastra Eastern Sleep Centers, Inc.
(Eastern) for a purchase price of $4.7 million.
The acquisition of Somni and Eastern was based on
managements belief that the acquisitions solidified the
Company as a national leader in the diagnosis and management of
sleep disorders. The acquisition decision was also based on
expected operational benefits resulting from economies of scale
and reduced overall overhead expenses.
The Somni and Eastern acquisitions were recorded by allocating
the cost of the acquisitions to the assets acquired, including
intangible assets and liabilities assumed based on their
estimated fair values at the acquisition date. The excess of the
cost of the acquisitions over the net amounts assigned to the
fair value of the assets acquired, net of liabilities assumed,
was recorded as goodwill, none of which is tax deductible. As of
December 31, 2009, management had completed a preliminary
valuation of the fair values of the assets acquired and
liabilities assumed in the Somni and Eastern acquisitions. In
March 2010, management completed
F-16
the fair value analysis and no adjustments were made to the
amounts recorded at December 31, 2009. The final purchase
allocations for the Somni and Eastern acquisitions were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Somni
|
|
|
Eastern
|
|
|
Cash and cash equivalents
|
|
$
|
225,774
|
|
|
$
|
33,389
|
|
Accounts receivable
|
|
|
1,002,334
|
|
|
|
455,120
|
|
Inventories
|
|
|
78,358
|
|
|
|
6,307
|
|
Other current assets
|
|
|
36,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,342,765
|
|
|
|
494,816
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,060,362
|
|
|
|
157,109
|
|
Intangible assets
|
|
|
1,455,000
|
|
|
|
3,991,000
|
|
Goodwill
|
|
|
3,747,379
|
|
|
|
163,730
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
7,605,506
|
|
|
|
4,806,655
|
|
|
|
|
|
|
|
|
|
|
Less: Liabilities assumed:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
548,197
|
|
|
|
39,497
|
|
Short-term debt
|
|
|
501,667
|
|
|
|
|
|
Long-term debt
|
|
|
655,642
|
|
|
|
67,158
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,705,506
|
|
|
|
106,655
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
5,900,000
|
|
|
$
|
4,700,000
|
|
|
|
|
|
|
|
|
|
|
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.
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
date been January 1, 2009, 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
|
|
$
|
26,009,000
|
|
|
$
|
(3,896,000
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share (basic and diluted)
from net income (loss) attributable to Graymark
|
|
|
|
|
|
|
|
|
Healthcare, Inc.:
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
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.
|
|
Note 6
|
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 operated 18
F-17
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 ApothecaryRx assets
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.
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 notes
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. The resulting total Purchase
Price was $29.3 million. Of the Purchase Price, $2,000,000
was deposited in an escrow fund (the Indemnity Escrow
Fund) pursuant to the terms of an indemnity escrow
agreement. 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.
Generally, in December 2011 (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 in May 2012
(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).
During 2010, the Company recorded a special charge of
approximately $6.5 million ($0.22 per share) related to
certain estimated costs resulting from the ApothecaryRx Sale.
The components of the special charge are as follows:
|
|
|
|
|
Loss on liquidation of inventory
|
|
$
|
2,041,051
|
|
Bad debt expense on remaining accounts receivable
|
|
|
3,003,190
|
|
Lease termination costs
|
|
|
859,580
|
|
Severance and payroll costs
|
|
|
493,303
|
|
Equipment removal and lease termination costs
|
|
|
119,489
|
|
|
|
|
|
|
Total charge
|
|
$
|
6,516,613
|
|
|
|
|
|
|
The charges noted above were incurred as a result of the
following:
|
|
|
|
|
The Company did not sell certain of the front-end merchandise
and private-label and other over the counter drugs as part of
the ApothecaryRx Sale. The loss on liquidation of inventory
represents the loss on items that have been liquidated and the
write-down of remaining inventory to expected liquidated values.
|
|
|
|
|
|
The Company has recorded a reserve for substantially all
outstanding accounts receivable that have not been collected as
of January 31, 2011. Historically, the Company has
collected accounts receivable within 30 days. After the
ApothecaryRx sale, the Company has seen a significant delay from
third-party payers. For example, as of March 15, 2011, the
State of Illinois owes the Company approximately
$0.7 million. The payment on this receivable has been
delayed due to underfunding of the States Medicaid
program. The Company will continue collection efforts on the
balances owed and any future receipts will be recorded as a bad
debt recovery in the period collected.
|
F-18
|
|
|
|
|
The Company incurred certain severance and payroll costs, lease
termination costs and equipment removal costs related to the
pharmacy locations which were not assumed by the buyer.
|
Additional charges may be recorded in future periods dependent
upon the final resolution of the items listed above.
The operating results of ApothecaryRx and the Companys
other discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenues
|
|
$
|
79,038,856
|
|
|
$
|
89,669,301
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes ApothecaryRx
|
|
$
|
(324,092
|
)
|
|
$
|
1,992,005
|
|
Income (loss) before taxes other
|
|
|
(220,258
|
)
|
|
|
6,896
|
|
Income tax (provision)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued operations, net of
tax
|
|
|
(544,350
|
)
|
|
|
1,998,901
|
|
Special (charges) incurred on sale
|
|
|
(6,516,613
|
)
|
|
|
|
|
Gain recorded on sale
|
|
|
5,644,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(1,416,083
|
)
|
|
$
|
1,998,901
|
|
|
|
|
|
|
|
|
|
|
As noted above, the Companys other discontinued operations
generated net income (loss) of ($220,258) and $6,896 during the
years ended December 31, 2010 and 2009, respectively.
During the year ended December 31, 2010, other discontinued
operations included a loss from the Companys discontinued
internet sales channel of ($225,948) which was offset by income
from the Companys discontinued film operations of $5,690.
During the year ended December 31, 2009, the Companys
discontinued film operations generated income of $6,896.
The balance sheet items for ApothecaryRx and the Companys
other discontinued operations as of December 31, 2010 and
2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash and cash equivalents
|
|
$
|
692,261
|
|
|
$
|
796,961
|
|
Accounts receivable, net of allowances
|
|
|
675,501
|
|
|
|
7,421,407
|
|
Inventories
|
|
|
68,267
|
|
|
|
7,882,717
|
|
Indemnity Escrow Fund
|
|
|
1,000,000
|
|
|
|
|
|
Other current assets
|
|
|
349,803
|
|
|
|
210,943
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,785,832
|
|
|
|
16,312,028
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
101,013
|
|
|
|
992,481
|
|
Indemnity Escrow Fund
|
|
|
1,000,000
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
7,005,704
|
|
Goodwill
|
|
|
|
|
|
|
13,089,138
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
1,101,013
|
|
|
|
21,087,323
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,886,845
|
|
|
$
|
37,399,351
|
|
|
|
|
|
|
|
|
|
|
Payables and accrued liabilities
|
|
$
|
2,015,277
|
|
|
$
|
6,107,109
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
1,783,298
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,015,277
|
|
|
|
7,890,407
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
23,694,319
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,015,277
|
|
|
$
|
31,584,726
|
|
|
|
|
|
|
|
|
|
|
F-19
As of December 31, 2010, the balance sheet items from
discontinued operations noted above include inventory, other
current assets, and accounts payable of $68,267, $2,348 and
$13,992, respectively, attributable to the Companys
discontinued internet sales channel. There were no balance sheet
items attributable to the Companys other discontinued
operations as of December 31, 2009.
|
|
Note 7
|
Property
and Equipment
|
Following are the components of property and equipment included
in the accompanying consolidated balance sheets as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Equipment
|
|
$
|
3,283,694
|
|
|
$
|
4,849,083
|
|
Furniture and fixtures
|
|
|
610,929
|
|
|
|
1,066,362
|
|
Software
|
|
|
577,138
|
|
|
|
530,433
|
|
Vehicles
|
|
|
144,410
|
|
|
|
288,646
|
|
Leasehold improvements
|
|
|
1,498,701
|
|
|
|
1,701,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,114,872
|
|
|
|
8,436,451
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(2,143,345
|
)
|
|
|
(2,125,290
|
)
|
Less: Discontinued operations
|
|
|
101,013
|
|
|
|
992,481
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,870,514
|
|
|
$
|
5,318,680
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2010
and 2009 was $1,110,224 and $952,432, respectively. Depreciation
expense for the years ended December 31, 2010 and 2009,
included in discontinued operations, was $237,216 and $271,093,
respectively.
During 2010, the Company identified impairment indicators
relating to property and equipment at certain sleep diagnostic
facilities and certain administrative facilities. The impairment
indicators related primarily to sleep diagnostic systems that
were no longer compatible with current systems and assets
associated with sleep diagnostic and office facilities that were
closed or consolidated into other locations. Accordingly, the
Company 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 for the year ended December 31, 2010 was
recorded as a component of operating expenses in the
accompanying consolidated financial statements. There was no
impairment charge recorded in 2009.
|
|
Note 8
|
Goodwill
and Other Intangibles
|
Changes in the carrying amount of goodwill during the years
ended December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Gross
|
|
|
Impairment
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Losses
|
|
|
Value
|
|
|
January 1, 2009
|
|
$
|
16,605,785
|
|
|
$
|
|
|
|
$
|
16,605,785
|
|
Business acquisitions
|
|
|
3,911,109
|
|
|
|
|
|
|
|
3,911,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
20,516,894
|
|
|
|
|
|
|
|
20,516,894
|
|
Impairment charge
|
|
|
|
|
|
|
(7,508,941
|
)
|
|
|
(7,508,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
$
|
20,516,894
|
|
|
$
|
(7,508,941
|
)
|
|
$
|
13,007,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Company had approximately
$13.0 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 and
F-20
indefinite-lived intangible assets 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 impairment test to determine the
amount of impairment loss on goodwill and all related intangible
assets. The second step of the impairment test involves
comparing the implied fair value of the affected reporting
units goodwill with the carrying value of that goodwill.
Based on the Companys (i) assessment of current and
expected future economic conditions, (ii) trends,
strategies and forecasted cash flows at each business unit and
(iii) assumptions similar to those that market participants
would make in valuing the Companys business units, the
Company determined that the carrying value of goodwill related
to the Companys sleep centers located in Oklahoma, Nevada
and Texas exceeded their fair value. In addition, the Company
determined the carrying value of the Companys intangible
assets associated with Eastern and certain other intangibles
exceeded their fair value. Accordingly, the Company recorded a
noncash impairment charge, in December 2010, of
$7.5 million and $3.2 million, respectively, on
goodwill and other intangible assets. The Companys
evaluation of goodwill and indefinite lived intangible assets
completed during 2009 resulted in no impairment losses.
Changes in the carrying amount of intangible assets during the
years ended December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Impairment
|
|
|
Amortization
|
|
|
|
|
|
|
Amount
|
|
|
Losses
|
|
|
Accumulated
|
|
|
Net
|
|
|
January 1, 2009
|
|
$
|
630,000
|
|
|
$
|
|
|
|
$
|
(82,722
|
)
|
|
$
|
547,278
|
|
Business acquisitions
|
|
|
5,446,000
|
|
|
|
|
|
|
|
|
|
|
|
5,446,000
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
(121,700
|
)
|
|
|
(121,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
6,076,000
|
|
|
|
|
|
|
|
(204,422
|
)
|
|
|
5,871,578
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
(227,766
|
)
|
|
|
(227,766
|
)
|
Impairment charge
|
|
|
|
|
|
|
(3,243,056
|
)
|
|
|
|
|
|
|
(3,243,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
$
|
6,076,000
|
|
|
$
|
(3,243,056
|
)
|
|
$
|
(432,188
|
)
|
|
$
|
2,400,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets as of December 31, 2010 and 2009 include
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
2010
|
|
|
2009
|
|
|
|
Life
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
Value(1)
|
|
|
Amortization
|
|
|
Net
|
|
|
Value(1)
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer relationships
|
|
Indefinite
|
|
$
|
1,046,000
|
|
|
$
|
|
|
|
$
|
1,046,000
|
|
|
$
|
3,870,000
|
|
|
$
|
|
|
|
$
|
3,870,000
|
|
Customer relationships
|
|
5 - 15
|
|
|
1,139,333
|
|
|
|
(231,333
|
)
|
|
|
908,000
|
|
|
|
1,450,000
|
|
|
|
(111,031
|
)
|
|
|
1,338,969
|
|
Covenants not to compete
|
|
3 - 15
|
|
|
228,000
|
|
|
|
(145,889
|
)
|
|
|
82,111
|
|
|
|
295,000
|
|
|
|
(76,525
|
)
|
|
|
218,475
|
|
Trademark
|
|
10
|
|
|
229,611
|
|
|
|
(38,078
|
)
|
|
|
191,533
|
|
|
|
271,000
|
|
|
|
(12,644
|
)
|
|
|
258,356
|
|
Payor contracts
|
|
15
|
|
|
190,000
|
|
|
|
(16,888
|
)
|
|
|
173,112
|
|
|
|
190,000
|
|
|
|
(4,222
|
)
|
|
|
185,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
2,832,944
|
|
|
$
|
(432,188
|
)
|
|
$
|
2,400,756
|
|
|
$
|
6,076,000
|
|
|
$
|
(204,422
|
)
|
|
$
|
5,871,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The carrying value is net of accumulated impairment charges. |
As part of the acquisition of Eastern, the Company acquired a
management services agreement (MSA) under which the
Company provides certain services to the sleep centers owned by
Independent Medical Practices (IMA) including
billing and collections, trademark rights, non-clinical sleep
center management services, equipment rental fees, general
management services, legal support and accounting and
bookkeeping services. IMAs responsibilities include
conducting and overseeing the sleep studies, oversight and
management
F-21
of the sleep center clinical staff and facility lease costs
through a
sub-lease of
the facilities from the Company. The MSA has a 10 year
initial term with automatic renewal at the end of that and each
subsequent term. The fee payable under the MSA is renegotiated
at the end of each annual term. For the years ended
December 31, 2010 and 2009, the management fees collected
under the MSA were $2,242,718 and $689,717, respectively, and
are included in services revenue. The MSA is essentially a
contract from which the Company expects to earn cash flow for
the foreseeable future. As a result, the Company considers the
MSA to have an indefinite life. Effective with the annual rate
renegotiation in October 2010, IMA renegotiated the monthly fee
it pays under the MSA from $195,203 to $161,964. As a result,
the Company determined that the carrying value of the MSA was
impaired and accordingly an impairment charge of $2,824,000 was
recorded. As of December 31, 2010 and 2009, the MSA had a
recorded value of $1,046,000 and $3,870,000, respectively.
The MSA was valued (initially and during the 2010 impairment
review) using the multi-period excess earnings method which
utilized expected future cash flows over 10 years plus a
terminal value for years beyond that date, adjusted for a
contributory asset charge, interest, depreciation and
amortization for each year and at the terminal value. These
amounts were then discounted using a cost of capital rate to
determine the net present value of the projected future earnings.
Amortization expense for the years ended December 31, 2010
and 2009 was $227,766 and $121,700, respectively. Amortization
expense for the years ended December 31, 2010 and 2009,
included in discontinued operations, was $710,857 and $842,985,
respectively. Amortization expense for the next five years
related to these intangible assets is expected to be as follows:
|
|
|
|
|
2011
|
|
$
|
156,519
|
|
2012
|
|
|
148,297
|
|
2013
|
|
|
131,853
|
|
2014
|
|
|
131,853
|
|
2015
|
|
|
128,923
|
|
Deferred
Offering Costs
As of December 31, 2010 and 2009, the Company has deferred
offering costs of approximately $435,000 and $176,000,
respectively. The costs have been incurred in conjunction with a
public stock offering that the Company expects to complete in
2011. To the extent that the Company is unsuccessful in
executing the stock offering, the deferred offering costs will
be charged to operations.
Equity
Investment in Non-Controlled Entity
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.
The Company has provided with documentation from the Fund
referencing tax credits which are available to the Company in
the amount of approximately $400,000. The tax credits expire in
2011. Given the Companys recent operating losses, it is
highly unlikely that the Company will utilize the tax credits.
As a result, management determined in the 4th quarter of
2010 that realization of the Companys $200,000 investment
from proceeds other than utilization of the tax credit was
remote and as a result an impairment charge of $200,000 was
recorded.
F-22
The Companys borrowings as of December 31, 2010 and
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
Rate(1)
|
|
Date
|
|
|
2010
|
|
|
2009
|
|
|
Senior bank debt
|
|
6%
|
|
|
May 2014
|
|
|
$
|
8,000,000
|
|
|
$
|
12,596,375
|
|
Bank line of credit
|
|
6%
|
|
|
June 2014 -
|
|
|
|
14,396,935
|
|
|
|
9,002,341
|
|
|
|
|
|
|
Aug. 2015
|
|
|
|
|
|
|
|
|
|
Sleep center working capital notes payable
|
|
3.25 - 6%
|
|
|
Jul. 2011 -
|
|
|
|
225,124
|
|
|
|
467,835
|
|
|
|
|
|
|
Jan. 2015
|
|
|
|
|
|
|
|
|
|
Notes payable on equipment
|
|
6 - 14%
|
|
|
Apr. 2012 -
|
|
|
|
417,249
|
|
|
|
570,947
|
|
|
|
|
|
|
Dec. 2013
|
|
|
|
|
|
|
|
|
|
Seller financing
|
|
7.6%
|
|
|
Sep. 2012
|
|
|
|
90,662
|
|
|
|
|
|
Notes payable on vehicles
|
|
2.9 -
|
|
|
Nov. 2012 -
|
|
|
|
63,586
|
|
|
|
104,764
|
|
|
|
3.9%
|
|
|
Dec. 2013
|
|
|
|
|
|
|
|
|
|
Insurance premium financing
|
|
2.97
|
|
|
Nov. 2011
|
|
|
|
12,075
|
|
|
|
68,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases, matured
|
|
|
|
|
|
|
|
|
|
|
|
|
81,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
|
|
|
|
|
|
23,205,631
|
|
|
|
22,891,892
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,816
|
)
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
(22,768,781
|
)
|
|
|
(480,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
$
|
436,850
|
|
|
$
|
22,215,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Effective rate as of December 31, 2010 |
In May 2008 and as amended in May 2009 and July 2010, 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 LLC
(SDC Holdings) and ApothecaryRx LLC. The Term Loan
and the Acquisition Line bear interest at the greater of the
prime rate as reported in the Wall Street Journal or the floor
rate of 6%. Prior to June 30, 2010, the floor rate was 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 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. The Company has also agreed to maintain certain
financial covenants including a Debt Service Coverage Ratio of
not less than 1.25 to 1 and Minimum Net Worth, as defined.
As of December 31, 2010, the Companys Debt Service
Coverage Ratio is less than 1.25 to 1 and the Company does not
meet the Minimum Net Worth requirement. Arvest Bank has waived
the Debt Service Coverage Ratio and Minimum Net Worth
requirements through June 30, 2011 assuming the Company
makes a $3 million principal payment by June 30, 2011.
The Company expects to raise the funds necessary to make the
principal payment through additional equity or debt financing
(see Note 2 Basis of Presentation). There is no
assurance that Arvest Bank will waive Debt Service Coverage
Ratio and Minimum Net Worth
F-23
requirements beyond June 30, 2011. Due to the
non-compliance of these waivers and the associated contingent
nature of achieving compliance before June 30, 2011, the
associated debt has been classified as current on the
accompanying consolidated balance sheets.
The Company 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,
2010 of $225,124 bear 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 6.0%. The Company is required to make monthly
payments of principal and interest totaling $29,828. The notes
mature on varying dates from July 2011 to January 2015.
The Company has entered into various notes payable for the
purchase of sleep diagnostic equipment. The balance owed at
December 31, 2010 of $417,249 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.
As part of the sale of ApothecaryRx assets, the Company retained
one seller financing note payable. The note bears interest at a
fixed rate of 7.6% and matures in September 2012. The Company is
required to make monthly payments of principal and interest of
$4,627. The balance of the note as of December 31, 2009 was
$137,325 and is included in liabilities from discontinued
operations.
The Company 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.
The Company has entered into a short-term premium financing
arrangement for certain insurance coverage. The financing
arrangement bears interest at 2.97% and matures in November 2011.
At December 31, 2010, future maturities of long-term debt
were as follows:
|
|
|
|
|
2011
|
|
$
|
22,768,781
|
|
2012
|
|
|
244,137
|
|
2013
|
|
|
169,871
|
|
2014
|
|
|
22,842
|
|
2015
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
Note 11
|
Commitments
and Contingencies
|
Legal
Issues
The Company is exposed to asserted and unasserted legal claims
encountered in the normal course of business. Management
believes that the ultimate resolution of these matters will not
have a material adverse effect on the operating results or the
financial position of the Company. During the years ended
December 31, 2010 and 2009, the Company did not incur any
costs in settlement expenses related to its ongoing asserted and
unasserted legal claims.
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
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 2010
and 2009 was $1,908,322 and $1,558,478, respectively. The
Companys rental expense for operating leases in 2010 and
2009, included in discontinued operations, was $1,024,897 and
$1,232,613, respectively.
F-24
Following is a summary of the future minimum lease payments
under operating leases as of December 31, 2010:
|
|
|
|
|
2011
|
|
$
|
1,866,865
|
|
2012
|
|
|
1,519,991
|
|
2013
|
|
|
1,292,746
|
|
2014
|
|
|
830,094
|
|
2015
|
|
|
519,365
|
|
Thereafter
|
|
|
2,489,158
|
|
|
|
|
|
|
Total
|
|
$
|
8,518,219
|
|
|
|
|
|
|
Significant
Supplier
The Company is dependent on merchandise vendors to provide sleep
disorder related products for resale. The Companys largest
sleep product supplier is Fisher and Paykel Healthcare, which
supplied approximately 39% of the Companys sleep supplies
in the year ended December 31, 2010. In the fiscal year
ended December 31, 2009, the Companys largest sleep
product supplier was Resmed, which supplied approximately 37% of
the Companys sleep supplies. In managements opinion,
if any of these relationships were terminated or if any
contracting party were to experience events precluding
fulfillment of the Companys needs, the Company would be
able to find a suitable alternative supplier, but possibly not
without significant disruption to the Companys 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.
The income tax provision for the years ended December 31,
2010 and 2009 consists of:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Current provision
|
|
$
|
166,795
|
|
|
$
|
|
|
Deferred provision (benefit)
|
|
|
998,000
|
|
|
|
(2,273,000
|
)
|
Change in beginning of year valuation allowance
|
|
|
(998,000
|
)
|
|
|
2,273,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
166,795
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Current provision, discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company expensed $110,000 during the year ended
December 31, 2010 for estimated penalties incurred for
filing certain Federal tax returns late. The amount expensed is
included in the income tax provision. There were no estimated
penalties expensed during the year ended December 31, 2009.
F-25
Deferred income tax assets and liabilities as of
December 31, 2010 and 2009 are comprised of:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,664,000
|
|
|
$
|
289,000
|
|
Accrued liabilities
|
|
|
106,000
|
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,770,000
|
|
|
|
340,000
|
|
Valuation allowance
|
|
|
(1,770,000
|
)
|
|
|
(57,000
|
)
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
|
|
|
|
283,000
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,839,000
|
|
|
|
9,025,000
|
|
Net operating loss carryforwards
|
|
|
4,725,000
|
|
|
|
3,231,000
|
|
State tax credit carryforwards
|
|
|
400,000
|
|
|
|
400,000
|
|
Intangible assets
|
|
|
154,000
|
|
|
|
278,000
|
|
Acquisition costs
|
|
|
38,000
|
|
|
|
104,000
|
|
Stock awards
|
|
|
69,000
|
|
|
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,225,000
|
|
|
|
13,117,000
|
|
Valuation allowance
|
|
|
(9,849,000
|
)
|
|
|
(12,560,000
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term deferred tax assets
|
|
|
376,000
|
|
|
|
557,000
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Tax accounting changes
|
|
|
|
|
|
|
283,000
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
376,000
|
|
|
|
557,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The change in the Companys valuation allowance on deferred
tax assets during the years ended December 31, 2010 and
2009 follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning valuation allowance
|
|
$
|
12,617,000
|
|
|
$
|
10,344,000
|
|
Change in valuation allowance
|
|
|
(998,000
|
)
|
|
|
2,273,000
|
|
|
|
|
|
|
|
|
|
|
Ending valuation allowance
|
|
$
|
11,619,000
|
|
|
$
|
12,617,000
|
|
|
|
|
|
|
|
|
|
|
The Companys effective income tax rate for continuing
operations differs from the U.S. Federal statutory rate as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Change in valuation allowance
|
|
|
5.2
|
|
|
|
(43.8
|
)
|
Nondeductible impairment charges
|
|
|
(29.6
|
)
|
|
|
|
|
Other
|
|
|
(9.7
|
)
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.9
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had federal and state net
operating loss carryforwards of approximately $13,499,000,
expiring at various dates through 2025. Approximately $3,012,000
of the Companys net operating loss carryforwards are
subject to an annual limitation of approximately $218,000.
F-26
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 13
|
Capital
Structure
|
During the year ended December 31, 2009, the holders of
certain placement agent warrants exercised their warrants. These
warrants were exercisable for the purchase of 66,242 shares
of common stock and were issued in connection with our 2008
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. The
Company issued 35,104 shares 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.
|
|
Note 14
|
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 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 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.
F-27
The assumptions used to value the option and warrant grants are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Expected life (in years)
|
|
|
2.5
|
|
|
|
1.0 - 3.5
|
|
Volatility
|
|
|
81
|
%
|
|
|
55
|
%
|
Risk free interest rate
|
|
|
0.4
|
%
|
|
|
0.4 - 2.0
|
%
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
Information with respect to stock options and warrants
outstanding follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at January 1, 2009
|
|
|
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
|
|
Granted options
|
|
|
125,000
|
|
|
|
1.18
|
|
Forfeited warrants
|
|
|
(200,000
|
)
|
|
|
2.50
|
|
Forfeited options
|
|
|
(170,195
|
)
|
|
|
4.06
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
581,668
|
|
|
$
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and Warrants
|
|
|
|
Options and Warrants Outstanding
|
|
|
Exercisable
|
|
|
|
Shares
|
|
|
Average
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
|
at 12/31/10
|
|
|
Life (Years)
|
|
|
Price
|
|
|
at 12/31/10
|
|
|
Price
|
|
|
$1.01 to $3.00
|
|
|
428,130
|
|
|
|
3.4
|
|
|
$
|
1.96
|
|
|
|
344,797
|
|
|
$
|
2.04
|
|
$3.01 to $5.00
|
|
|
152,000
|
|
|
|
2.1
|
|
|
|
3.75
|
|
|
|
152,000
|
|
|
|
3.75
|
|
$5.01 to $7.00
|
|
|
1,538
|
|
|
|
2.6
|
|
|
|
6.50
|
|
|
|
1,538
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
581,668
|
|
|
|
|
|
|
|
|
|
|
|
498,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the 125,000 and 232,860 options issued in 2010
and 2009 was estimated to be approximately $71,000 and $103,000,
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 $84,000 and
$39,000 during 2010 and 2009, 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, 2010 and 2009 had no
intrinsic value. The intrinsic value is calculated as the
difference between the market value and exercise price of the
shares.
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, 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
|
|
Granted
|
|
|
210,000
|
|
|
|
1.14
|
|
Vested
|
|
|
(337,500
|
)
|
|
|
1.45
|
|
Forfeited
|
|
|
(207,500
|
)
|
|
|
1.72
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2010
|
|
|
90,000
|
|
|
$
|
2.44
|
|
|
|
|
|
|
|
|
|
|
During 2010 and 2009, the Company issued 210,000 and 702,669,
respectively, restricted stock grant awards to certain key
employees and directors. The fair value of the restricted stock
grant awards was $239,000 and $1,365,704, 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 2010 and 2009, the Company recorded
compensation expense related to stock grant awards of
approximately $390,000 and $682,000, respectively. As of
December 31, 2010 and 2009, the Company has unrecognized
compensation expense associated with the stock grants, options
and warrants of approximately $464,000 and $754,000,
respectively.
|
|
Note 15
|
Fair
Value Measurements
|
Fair value is the price that would be received from the sale of
an asset or paid to transfer a liability (i.e., an exit price)
in the principal or most advantageous market in an orderly
transaction between market participants. In determining fair
value, the accounting standards established a three-level
hierarchy that distinguishes between (i) market data
obtained or developed from independent sources (i.e., observable
data inputs) and (ii) a reporting entitys own data
and assumptions that market participants would use in pricing an
asset or liability (i.e., unobservable data inputs). Financial
assets and financial liabilities measured and reported at fair
value are classified in one of the following categories, in
order of priority of observability and objectivity of pricing
inputs:
|
|
|
|
|
Level 1 Fair value based on quoted
prices in active markets for identical assets or liabilities.
|
|
|
|
|
|
Level 2 Fair value based on significant
directly observable data (other than Level 1 quoted prices)
or significant indirectly observable data through corroboration
with observable market data. Inputs would normally be
(i) quoted prices in active markets for similar assets or
liabilities, (ii) quoted prices in inactive markets for
identical or similar assets or liabilities or
(iii) information derived from or corroborated by
observable market data.
|
|
|
|
|
|
Level 3 Fair value based on prices or
valuation techniques that require significant unobservable data
inputs. Inputs would normally be a reporting entitys own
data and judgments about assumptions that market participants
would use in pricing the asset or liability.
|
The fair value measurement level for an asset or liability is
based on the lowest level of any input that is significant to
the fair value measurement. Valuation techniques should maximize
the use of observable inputs and minimize the use of
unobservable inputs.
Recurring Fair Value Measurements: The
carrying value of the Companys financial assets and
financial liabilities is their cost, which may differ from fair
value. The carrying value of cash held as demand deposits, money
market and certificates of deposit, accounts receivable,
short-term borrowings, accounts payable and
F-29
accrued liabilities approximated their fair value. The fair
value of the Companys long-term debt, including the
current portion approximated its carrying value. Fair value for
long-term debt was estimated based on quoted market prices of
the identical debt instruments or values of comparable
borrowings.
Nonrecurring Fair Value Measurements: Goodwill
and indefinite-lived intangible assets are tested for possible
impairment as of the beginning of the fourth quarter of each
year. During 2010, management concluded that the carrying values
of goodwill and certain intangible assets at its sleep centers
located in Nevada, Oklahoma and Texas exceeded their respective
fair values. In addition, the carrying value of the
Companys indefinite lived intangible asset and certain
other intangible assets associated with the MSA at Eastern
exceeded their fair value. As a result, the Company recorded
impairment charges totaling $10.8 million to write down the
goodwill and intangible assets to their respective implied fair
values. Also during 2010, the Company identified impairment
indicators relating to property and equipment at certain sleep
diagnostic facilities and certain administrative facilities and
determined 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 during 2010 to write down the property and
equipment to its implied fair value. These nonrecurring fair
value measurements were developed using significant unobservable
inputs (Level 3). The primary valuation technique used was
an income methodology based on managements estimates of
forecasted cash flows for each business unit, with those cash
flows discounted to present value using rates commensurate with
the risks of those cash flows. Assumptions used by management
were similar to those that would be used by market participants
performing valuations of these business units and were based on
analysis of current and expected future economic conditions and
the updated strategic plan for each business unit.
The fair value measurements for the Companys assets
measured at fair value on a nonrecurring basis as of
December 31, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Year
|
|
|
Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
|
|
Ended
|
|
|
Identical
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
Total Gains
|
|
Assets
|
|
12/31/2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
Goodwill
|
|
$
|
13,007,953
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,007,953
|
|
|
$
|
(7,508,941
|
)
|
Intangible assets
|
|
|
2,400,756
|
|
|
|
|
|
|
|
|
|
|
|
2,400,756
|
|
|
|
(3,243,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,751,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16
|
Related
Party Transactions
|
On March 16, 2011, the Company executed a promissory note
with Valiant Investments, LLC in the amount of $1,000,000. The
note bears interest at 6%. All accrued interest and principal
are due at the maturity of the Note on August 1, 2011. The
proceeds from the note will be drawn through a series of
advances and will be used for working capital. Valiant
Investments, LLC is controlled by Mr. Roy T. Oliver, one of
the Companys greater than 5% shareholders and affiliates.
The promissory note is subordinate to the Companys credit
facility with Arvest Bank.
As of December 31, 2010 and 2009, the Company had
approximately $0.6 million and $0.7 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 Company is
obligated to Valliance Bank under certain sleep center capital
notes totaling approximately $110,000 and $193,000 at
December 31, 2010 and 2009, respectively. The interest
rates on the notes are fixed at 6%. Non-controlling interests in
Valliance Bank are held by Mr. Stanton Nelson, the
Companys chief executive officer and Mr. Joseph
Harroz, Jr., one of the Companys directors.
Mr. Nelson and Mr. Harroz also serve as directors 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 $7,000. From April 2010
through November 2010, the Company paid a reduced monthly rental
payment of $4,200 per month and prior to April 2010, the monthly
rental payments were $10,300. Mr. Roy T. Oliver, one of the
Companys greater than 5% shareholders and affiliates,
controls
F-30
Oklahoma Tower Realty Investors, LLC (Oklahoma
Tower). During the years ended December 31, 2010 and
2009, the Company incurred approximately $75,000 and $132,000,
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.
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 year ended December 31, 2009, the Company paid
approximately $24,000 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.
|
|
Note 17
|
Subsequent
Events
|
Management evaluated all activity of the Company and concluded
that no subsequent events have occurred that would require
recognition in the consolidated financial statements or
disclosure in the notes to the consolidated financial
statements, except the following:
On March 16, 2011, the Company executed a promissory note
with Valiant Investments, LLC in the amount of $1,000,000. The
note bears interest at 6%. All accrued interest and principal
are due at the maturity of the Note on August 1, 2011. The
proceeds from the note will be drawn through a series of
advances and will be used for working capital. Valiant
Investments, LLC is controlled by Mr. Roy T. Oliver, one of
the Companys greater than 5% shareholders and affiliates.
The promissory note is subordinate to the Companys credit
facility with Arvest Bank.
On January 26, 2011, the Companys Board of Directors
approved a reverse stock split in one of five ratios, namely 1
for 2, 3, 4, 5 or 6. On February 1, 2011, the Company
received the consent of a majority of its stockholders for this
reverse stock split. The Companys Board of Directors has
the authority to determine the exact ratio of the reverse stock
split. The Company intends to effect the reverse stock split in
connection with the consummation of a planned public stock
offering.
|
|
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, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
|
|
Interest expense, continuing operations
|
|
$
|
1,230,000
|
|
|
$
|
989,000
|
|
Interest expense, discontinued operations
|
|
|
1,345,000
|
|
|
|
1,453,000
|
|
Income taxes
|
|
|
20,000
|
|
|
|
39,000
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Common stock and stock options issued in business acquisitions
|
|
$
|
|
|
|
$
|
1,544,000
|
|
F-31
20,000,000 Shares
Graymark Healthcare,
Inc.
Common Stock
Prospectus
Roth Capital Partners
,
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.
II-3
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits
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 Amendment
No. 2 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in
Oklahoma City, State of Oklahoma, on the 28th day of March
2011.
GRAYMARK HEALTHCARE, INC.
Stanton Nelson
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 2 to this Registration
Statement has been signed below by the following persons in the
capacities indicated on March 28, 2011.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Stanton
Nelson
Stanton
Nelson
|
|
Chief Executive Officer and Chairman of the Board (Principal
Executive Officer)
|
|
|
|
/s/ Edward
M. Carriero, Jr.
Edward
M. Carriero, Jr.
|
|
Chief Financial Officer (Principal Financial Officer)
|
|
|
|
/s/ Grant
A. Christianson
Grant
A. Christianson
|
|
Chief Accounting Officer (Principal Accounting Officer)
|
|
|
|
*
Joseph
Harroz, Jr.
|
|
Director
|
|
|
|
*
Scott
Mueller
|
|
Director
|
|
|
|
*
S.
Edward Dakil, M.D.
|
|
Director
|
|
|
|
*
Steven
List
|
|
Director
|
|
|
|
|
|
*By:
|
|
/s/ Stanton
Nelson
Stanton
Nelson
Attorney-In-Fact
|
|
|
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
|
.22.4+
|
|
Amended and Restated Loan Agreement dated December 17, 2010 by
and among Graymark Healthcare, Inc., 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, Kevin Lewis, Roger Ely,
Lewis P. Zeidner and Arvest Bank.
|
|
10
|
.22.5
|
|
Letter Agreement dated March 11, 2011 by and between Graymark
Healthcare, Inc. and Arvest Bank, is incorporated by reference
to Exhibit 99.1 to the Registrants Current Report on Form
8-K filed on March 22, 2011.
|
|
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.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
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.
|
|
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 7, 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 incorporated by
reference to Exhibit 10.1 to the Registrants Current
Report on
Form 8-K
filed on August 24, 2010.
|
|
10
|
.36.1
|
|
Loan Agreement dated March 16, 2011 by and between Valiant
Investments LLC and Graymark Healthcare, Inc., is incorporated
by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed on March 22, 2011.
|
|
10
|
.36.2
|
|
Note dated March 16, 2011 issued by Graymark Healthcare, Inc.,
is incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed on March 22,
2011.
|
|
10
|
.36.3
|
|
Subordination Agreement dated March 16, 2011 by and among
Valiant Investments, L.L.C., ApothecaryRx, LLC, SDC Holdings LLC
and Graymark Healthcare, Inc., in favor of Arvest Bank, is
incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K filed on March 22,
2011.
|
|
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. |
|
+ |
|
Filed herewith. |