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DYII > SEC Filings for DYII > Form 10-Q on 29-May-2013All Recent SEC Filings

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Form 10-Q for DYNACQ HEALTHCARE INC


29-May-2013

Quarterly Report


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

This quarterly report on Form 10-Q contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Such forward-looking statements relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our Company's 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 the forward-looking statements, including the risks and uncertainties described in "Risk Factors" in our annual report on Form 10-K for the fiscal year ended August 31, 2012. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You must read the following discussion of the results of our business and our operations and financial condition in conjunction with our consolidated financial statements, including the notes, included in this quarterly report on Form 10-Q and our audited consolidated financial statements, including the notes, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2012.


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Update on Critical Accounting Policies and Estimates

There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position for the quarter ended February 28, 2013. For a discussion of our critical accounting policies see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended August 31, 2012.


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Results of Operations



                                          Three Months Ended February 28, 2013                    Three Months Ended February 29, 2012
                                     U.S. Division       Corporate          Total           U.S. Division        Corporate           Total
Net patient service revenue         $     1,437,822      $       -       $  1,437,822      $       966,716      $         -       $    966,716

Costs and expenses:
Compensation and benefits                   922,853         472,087         1,394,940              964,412         1,054,810         2,019,222
Medical services and supplies               374,986              -            374,986              343,508                -            343,508
Other operating expenses                    671,645         450,686         1,122,331              990,283           341,228         1,331,511
Depreciation and amortization               115,747           5,996           121,743              115,206            24,451           139,657

Total costs and expenses                  2,085,231         928,769         3,014,000            2,413,409         1,420,489         3,833,898

Operating loss                             (647,409 )      (928,769 )      (1,576,178 )         (1,446,693 )      (1,420,489 )      (2,867,182 )

Other income (expense):
Rent and other income                         4,652         557,327           561,979                2,110         1,255,778         1,257,888
Interest income                                  -          170,840           170,840                   -            319,965           319,965
Interest expense                           (139,512 )            -           (139,512 )           (140,295 )          (2,970 )        (143,265 )

Total other income (expense), net          (134,860 )       728,167           593,307             (138,185 )       1,572,773         1,434,588

Income (loss) before income taxes
from continuing operations          $      (782,269 )    $ (200,602 )        (982,871 )    $    (1,584,878 )    $    152,284        (1,432,594 )

Benefit for income taxes                                                           -                                                        -

Loss from continuing operations                                              (982,871 )                                             (1,432,594 )
Discontinued operations, net of
income taxes                                                                  128,728                                                 (189,796 )
Loss on disposal of discontinued
operations, net of income taxes                                                    -                                                  (229,201 )

Net loss                                                                     (854,143 )                                             (1,851,591 )
Less: Net (income) loss
attributable to noncontrolling
interest                                                                          (25 )                                                 56,005

Net loss attributable to Dynacq
Healthcare, Inc.                                                         $   (854,168 )                                           $ (1,795,586 )

Operational statistics (Number of
medical procedures) for Pasadena
facility:
Inpatient:
Bariatric                                        16                                                     13
Orthopedic                                        1                                                     -
Other                                             9                                                     14

Total inpatient procedures                       26                                                     27

Outpatient:
Orthopedic                                       31                                                     28
Other                                           108                                                     93

Total outpatient procedures                     139                                                    121

Total procedures                                165                                                    148


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                                             Six Months Ended February 28, 2013                       Six Months Ended February 29, 2012
                                      U.S. Division        Corporate           Total           U.S. Division        Corporate           Total
Net patient service revenue          $     2,955,849      $         -       $  2,955,849      $     2,811,689      $         -       $  2,811,689

Costs and expenses:
Compensation and benefits                  1,815,140           968,624         2,783,764            1,929,426         1,767,165         3,696,591
Medical services and supplies                770,526                -            770,526              566,626                -            566,626
Other operating expenses                   1,398,585         2,295,997         3,694,582            1,803,519           805,235         2,608,754
Depreciation and amortization                227,988            17,507           245,495              224,638            49,538           274,176

Total costs and expenses                   4,212,239         3,282,128         7,494,367            4,524,209         2,621,938         7,146,147

Operating loss                            (1,256,390 )      (3,282,128 )      (4,538,518 )         (1,712,520 )      (2,621,938 )      (4,334,458 )

Other income (expense):
Rent and other income                         53,105         3,477,965         3,531,070               11,811         1,253,474         1,265,285
Interest income                                   -            475,654           475,654                   -            587,691           587,691
Interest expense                            (279,492 )          (1,281 )        (280,773 )           (288,818 )          (5,771 )        (294,589 )

Total other income (expense), net           (226,387 )       3,952,338         3,725,951             (277,007 )       1,835,394         1,558,387

Loss before income taxes from
continuing operations                $    (1,482,777 )    $    670,210          (812,567 )    $    (1,989,527 )    $   (786,544 )      (2,776,071 )

Benefit for income taxes                                                              -                                                        -

Loss from continuing operations                                                 (812,567 )                                             (2,776,071 )
Discontinued operations, net of
income taxes                                                                     370,086                                                 (817,927 )
Loss on disposal of discontinued
operations, net of income taxes                                                       -                                                  (229,201 )

Net loss                                                                        (442,481 )                                             (3,823,199 )
Less: Net loss attributable to
noncontrolling interest                                                            2,773                                                   83,520

Net loss attributable to Dynacq
Healthcare, Inc.                                                            $   (439,708 )                                           $ (3,739,679 )

Operational statistics (Number of
medical procedures) for Pasadena
facility:
Inpatient:
Bariatric                                         26                                                       30
Orthopedic                                         3                                                        1
Other                                             21                                                       45

Total inpatient procedures                        50                                                       76

Outpatient:
Orthopedic                                        65                                                       53
Other                                            253                                                      173

Total outpatient procedures                      318                                                      226

Total procedures                                 368                                                      302


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Three Months Ended February 28, 2013 Compared to the Three Months Ended February 29, 2012

U.S. Division

Through February 28, 2013, insurance carriers have voluntarily paid the awards in the decisions and orders issued by SOAH, plus interest, in approximately 180 cases, involving approximately $11 million in claims. In most of these cases, the carriers have requested refunds of the payments made in the event that the SOAH decisions and orders are reversed on appeal. Our request that the TDWC Commissioner enforce the awards which were not voluntarily paid by the carriers was refused in approximately 130 cases. Motions filed seeking a refund in some cases in which the awards were voluntarily paid have been granted and the Company has been ordered to refund approximately $4.2 million, including prejudgment interest, pending remand for a case-by-case determination of whether the services provided were unusually costly and unusually extensive. The Company deposited these amounts as cash deposits into the registry of the court in order to stay execution of the judgments ordering refunds. We anticipate that similar motions requesting remand and a refund for awards voluntarily paid will be filed and will likely be granted by the 345th Judicial District Court of Travis County, Texas. If and when these additional motions are granted, the Company will be ordered to refund an additional $7.8 million, not including prejudgment interest. As of February 28, 2013, the Company has accrued this amount of $7.8 million, and an additional amount of $1.9 million in interest payable, as accrued liabilities. The Company has appealed the judgments requiring a refund to the carriers. The briefs of the parties have been filed with the court of appeals and the Company is now waiting for the court of appeals to act on the appeals. While the appeals are pending, the adjudication of those cases remanded for determinations of whether the services provided were unusually costly and unusually extensive will continue. Voluntary payments made pursuant to the Decisions and Orders are premature payments by the carriers and may be ordered to be refunded. Once the Company is given the opportunity to present its evidence regarding whether the services provided were unusually costly and unusually extensive, the Company anticipates that it will prevail in the underlying stop-loss fee disputes and that payments refunded to the carriers will be recaptured.

Net patient service revenue increased by $471,106, or 49%, from $966,716 to $1,437,822, and total surgical cases increased by 11% from 148 cases for the quarter ended February 29, 2012 to 165 cases for the quarter ended February 28, 2013. While the number of cases increased by 11%, net patient service revenue increased by 49%, primarily due to a change in the surgical mix of cases, and collection on old accounts receivable that were fully reserved for.

Total costs and expenses decreased by $328,178, or 14%, from $2,413,409 for the quarter ended February 29, 2012 to $2,085,231 for the quarter ended February 28, 2013. The following discusses the various changes in costs and expenses:

Compensation and benefits decreased by $41,559, or 4%, primarily associated with reduction in workforce.

Medical services and supplies expenses increased by $31,478, or 9%, primarily due to an 11% increase in the number of cases.

Other operating expenses decreased by $318,638, or 32%, primarily due to efforts made by the Company to reduce costs.

Other income (expense) for the quarters ended February 28, 2013 and February 29, 2012 includes interest expense of $(139,512) and $(140,295), respectively, primarily associated with the stop-loss cases discussed above.

Corporate Division

Compensation and benefits for the Corporate Division includes all corporate personnel compensation and benefits. It also includes $44,327 and $82,244 of non-cash compensation expense for the quarters ended February 28, 2013 and February 29, 2012, respectively, related to employees' incentive stock options granted in fiscal years 2007, 2011 and 2012. Apart from the stock option expense discussed above, the decrease in 2013, compared to 2012, was 56%. The compensation expense is lower in the current period due to a reduction in the number of corporate staff, including marketing personnel. In addition, the Company had incurred a non-cash compensation charge of $50,000 in 2012 for issuance of common stock to an employee, and had paid the former chief financial officer an additional compensation of $77,000.


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Other operating expenses include all corporate general and administrative expenses, including other professional fees such as legal expenses and audit expenses. It increased by $109,458, from $341,228 for the quarter ended February 29, 2012 to $450,686 for the quarter ended February 28, 2013. The increase in other operating expenses is due to an increase in legal and other professional fees by approximately $107,000 primarily for general corporate affairs and also due to the internal investigation discussed in note 16 to our consolidated financial statements for the fiscal year ended August 31, 2012.

Rent and other income decreased by $698,451, from $1,255,778 for the quarter ended February 29, 2012 to $557,327 for the quarter ended February 28, 2013. Rent and other income for the quarter ended February 28, 2013 includes (a) a gain of $473,295 in trading securities, (b) an amount of $24,372 in foreign currency gains, and (c) miscellaneous other income of $59,660. Rent and other income for the quarter ended February 29, 2012 includes (a) a foreign currency gain of $1,422,590 realized due to the monies invested in China coming back to the U.S. (The Company had invested in its foreign subsidiaries in China during the prior few years, and due to a favorable change in exchange rates between the U.S. Dollar and the Chinese Yuan Renminbi, the Company had accumulated other comprehensive income of $1,422,590. This amount was realized as a gain during the quarter ended February 29, 2012 upon the return of investments from the Company's foreign subsidiaries in China.); (b) a gain of $108,491 in trading securities; (c) foreign currency exchange losses of $305,181, primarily on investments in Euro bonds; and (d) miscellaneous other income of $29,878.

Interest income of $170,840 and $319,965 for the quarters ended February 28, 2013 and February 29, 2012, respectively, are primarily related to the Company's investments in bonds.

Investments in securities

The Company has invested in various bonds. These investments are classified as available-for-sale securities, and are carried at fair value as of February 28, 2013, based on the other observable inputs and market data as of that date. As of February 28, 2013, these securities are valued at approximately $16.4 million. Unrealized gains in these investments of $8.4 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at February 28, 2013. During the quarters ended February 28, 2013 and February 29, 2012, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains of $473,295 and $108,491, respectively.

Discontinued Operations

The Company closed the Garland facility on September 30, 2011, and accordingly its operations for the fiscal year 2012 and the quarter ended February 28, 2013 continues to be classified as discontinued operations. The Company signed a commercial contract of sale on March 7, 2013 to sell its Garland facility. The sale is expected to close in June 2013. Net patient service revenue for the quarter ended February 28, 2013 was $191,333, due to receipts on old accounts receivable that were fully reserved earlier per the Company's revenue recognition policy. Net patient service revenue for the quarter ended February 29, 2012 was $93,711.

Total costs and expenses for the Garland facility for the quarters ended February 28, 2013 and February 29, 2012 was $52,225 and $252,947, respectively.

In previous years, the Corporate Division included costs and expenses the Company incurred at certain of its subsidiaries in China while pursuing various projects. All of the Company's foreign subsidiaries, except for Sino Bond, have been classified as discontinued operations, and exited completely in August 2012. Loss before income taxes in these subsidiaries was $20,249 for the quarter ended February 29, 2012. In addition, loss on disposal of discontinued operations in China was $229,201 for the quarter ended February 29, 2012.

Income Taxes

For the quarters ended February 28, 2013 and February 29, 2012, the Company did not recognize a benefit for income taxes due to the uncertainty of the Company's ability to recognize the benefit from the carry forward of net operating losses. The Company has recorded a full valuation allowance against the deferred tax asset.


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Six Months Ended February 28, 2013 Compared to the Six Months Ended February 29, 2012

U.S. Division

Through February 2013, insurance carriers have voluntarily paid the awards in the decisions and orders issued by SOAH, plus interest, in approximately 180 cases, involving approximately $11 million in claims. In most of these cases, the carriers have requested refunds of the payments made in the event that the SOAH decisions and orders are reversed on appeal. Our request that the TDWC Commissioner enforce the awards which were not voluntarily paid by the carriers was refused in approximately 130 cases. Motions filed seeking a refund in some cases in which the awards were voluntarily paid have been granted and the Company has been ordered to refund approximately $4.2 million, including prejudgment interest, pending remand for a case-by-case determination of whether the services provided were unusually costly and unusually extensive. The Company deposited these amounts as cash deposits into the registry of the court in order to stay execution of the judgments ordering refunds. We anticipate that similar motions requesting remand and a refund for awards voluntarily paid will be filed and will likely be granted by the 345th Judicial District Court of Travis County, Texas. If and when these additional motions are granted, the Company will be ordered to refund an additional $7.8 million, not including prejudgment interest. As of February 28, 2013, the Company has accrued this amount of $7.8 million, and an additional amount of $1.9 million in interest payable, as accrued liabilities. The Company has appealed the judgments requiring a refund to the carriers. The briefs of the parties have been filed with the court of appeals and the Company is now waiting for the court of appeals to act on the appeals. While the appeals are pending, the adjudication of those cases remanded for determinations of whether the services provided were unusually costly and unusually extensive will continue. Voluntary payments made pursuant to the Decisions and Orders are premature payments by the carriers and may be ordered to be refunded. Once the Company is given the opportunity to present its evidence regarding whether the services provided were unusually costly and unusually extensive, the Company anticipates that it will prevail in the underlying stop-loss fee disputes and that payments refunded to the carriers will be recaptured.

Net patient service revenue increased by $144,160, or 5%, from $2,811,689 to $2,955,849, and total surgical cases increased by 22% from 302 cases for the six months ended February 29, 2012 to 368 cases for the six months ended February 28, 2013. While the number of cases increased by 22%, net patient service revenue increased by 5%, primarily due to a change in the surgical mix of cases. Marginal increase in net patient revenues is due to lower number of inpatient cases, from 76 to 50, which typically have higher reimbursements.

Total costs and expenses decreased by $311,970, or 7%, from $4,524,209 for the six months ended February 29, 2012 to $4,212,239 for the six months ended February 28, 2013. The following discusses the various changes in costs and expenses:

Compensation and benefits decreased by $114,286, or 6%, primarily associated with reduction in workforce.

Medical services and supplies expenses increased by $203,900, or 36%, primarily due to a 22% increase in the number of cases, and also due to write-off of obsolete supplies.

Other operating expenses decreased by $404,934, or 22%, primarily due to efforts made by the Company to reduce costs.

Other income (expense) for the six months ended February 28, 2013 and February 29, 2012 includes interest expense of $(279,492) and $(288,818), respectively, primarily associated with the stop-loss cases discussed above.

Corporate Division

Compensation and benefits for the Corporate Division includes all corporate personnel compensation and benefits. It also includes $10,780 and $149,934 of non-cash compensation expense for the six months ended February 28, 2013 and February 29, 2012, respectively, related to employees' incentive stock options granted in fiscal years 2007, 2011 and 2012. The lower expense during the six months ended February 28, 2013 is the result of


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reversal of expenses for forfeiture of the unvested stock options. Apart from the stock option expense discussed above, the decrease in 2013, compared to 2012, was 41%. The compensation expense is lower in the current period due to a reduction in the number of corporate staff, including marketing personnel. In addition, the Company had incurred a non-cash compensation charge in 2012 of $50,000 for issuance of common stock to an employee, and had paid the former chief financial officer an additional compensation of $77,000.

Other operating expenses include all corporate general and administrative expenses, including other professional fees such as legal expenses and audit expenses. It increased by $1,490,762, from $805,235 for the six months ended February 29, 2012 to $2,295,997 for the six months ended February 28, 2013. The increase in other operating expenses is due to a significant increase in legal and other professional fees by approximately $1,419,000 primarily for the internal investigation discussed in note 16 to our consolidated financial statements for the fiscal year ended August 31, 2012. The Company has incurred significant amounts of fees related to this investigation, and may continue to do so for the remainder of fiscal year 2013.

Rent and other income increased by $2,224,491, from $1,253,474 for the six months ended February 29, 2012 to $3,477,965 for the six months ended February 28, 2013. Rent and other income for the six months ended February 28, 2013 includes (a) a gain of $2,199,500 on a bond called during the quarter,
(b) a gain of $480,108 on the sale of the apartment in Hong Kong, (c) an amount of $163,652 in foreign currency gains, (d) a gain of $531,673 in trading securities, and (e) miscellaneous other income of $103,031. Rent and other income for the six months ended February 29, 2012 includes (a) a foreign currency gain of $1,422,590 realized due to the monies invested in China coming back to the U.S. (The Company had invested in its foreign subsidiaries in China during the prior few years, and due to a favorable change in exchange rates between the U.S. Dollar and the Chinese Yuan Renminbi, the Company had accumulated other comprehensive income of $1,422,590. This amount was realized as a gain during the six months ended February 29, 2012 upon the return of investments from the Company's foreign subsidiaries in China.); (b) a loss of $57,101 in trading securities; (c) foreign currency exchange losses of $178,074, primarily on investments in Euro bonds; and (d) miscellaneous other income of $66,058.

Interest income of $475,654 and $587,691 for the six months ended February 28, 2013 and February 29, 2012, respectively, are primarily related to the Company's investments in bonds.

Investments in securities

The Company has invested in various bonds. These investments are classified as available-for-sale securities, and are carried at fair value as of February 28, 2013, based on other observable inputs and market data as of that date. As of February 28, 2013, these securities are valued at approximately $16.4 million. Unrealized gains in these investments of $8.4 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at February 28, 2013. During the six months ended February 28, 2013 and February 29, 2012, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains (losses) of $531,673 and $(57,101), respectively.

Discontinued Operations

The Company closed the Garland facility on September 30, 2011, and accordingly . . .

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