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DYII > SEC Filings for DYII > Form 10-Q on 2-Jul-2013All Recent SEC Filings

Show all filings for DYNACQ HEALTHCARE INC

Form 10-Q for DYNACQ HEALTHCARE INC


2-Jul-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.

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 May 31, 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.


Table of Contents

Results of Operations



                                           Three Months Ended May 31, 2013                         Three Months Ended May 31, 2012
                                   U.S. Division       Corporate          Total           U.S. Division        Corporate           Total
Net patient service revenue       $     1,558,762      $       -       $  1,558,762      $       920,662      $         -       $    920,662

Costs and expenses:
Compensation and benefits                 983,010         532,995         1,516,005            1,115,666         1,184,502         2,300,168
Medical services and supplies             463,715              -            463,715              460,642                -            460,642
Other operating expenses                  778,296         366,922         1,145,218              716,837           353,881         1,070,718
Depreciation and amortization             108,154           1,003           109,157              115,248            24,451           139,699

Total costs and expenses                2,333,175         900,920         3,234,095            2,408,393         1,562,834         3,971,227

Operating loss                           (774,413 )      (900,920 )      (1,675,333 )         (1,487,731 )      (1,562,834 )      (3,050,565 )

Other income (expense):
Rent and other income (expense)             3,430         173,712           177,142                8,980          (295,046 )        (286,066 )
Interest income                                -          203,310           203,310                   -            348,924           348,924
Interest expense                         (135,169 )            -           (135,169 )           (141,073 )          (3,061 )        (144,134 )

Total other income (expense),
net                                      (131,739 )       377,022           245,283             (132,093 )          50,817           (81,276 )

Loss before income taxes from
continuing operations             $      (906,152 )    $ (523,898 )      (1,430,050 )    $    (1,619,824 )    $ (1,512,017 )      (3,131,841 )

Benefit for income taxes                                                         -                                                        -

Loss from continuing operations                                          (1,430,050 )                                             (3,131,841 )
Discontinued operations, net of
income taxes                                                                  8,262                                                 (448,199 )
Loss on disposal of
discontinued operations, net of
income taxes                                                                     -                                                        -

Net loss                                                                 (1,421,788 )                                             (3,580,040 )
Less: Net loss attributable to
noncontrolling interest                                                          31                                                   49,767

Net loss attributable to Dynacq
Healthcare, Inc.                                                       $ (1,421,757 )                                           $ (3,530,273 )

Operational statistics (Number
of medical procedures) for
Pasadena facility:
Inpatient:
Bariatric                                      16                                                     20
Orthopedic                                      4                                                      7
Other                                           6                                                      6

Total inpatient procedures                     26                                                     33

Outpatient:
Orthopedic                                     28                                                     17
Other                                         137                                                    129

Total outpatient procedures                   165                                                    146

Total procedures                              191                                                    179


Table of Contents
                                             Nine Months Ended May 31, 2013                           Nine Months Ended May 31, 2012
                                    U.S. Division        Corporate           Total           U.S. Division        Corporate           Total
Net patient service revenue        $     4,514,611      $         -       $  4,514,611      $     3,732,351      $         -       $  3,732,351

Costs and expenses:
Compensation and benefits                2,798,150         1,501,619         4,299,769            3,045,092         2,951,667         5,996,759
Medical services and supplies            1,234,241                -          1,234,241            1,027,268                -          1,027,268
Other operating expenses                 2,176,881         2,662,919         4,839,800            2,520,356         1,159,116         3,679,472
Depreciation and amortization              336,142            18,510           354,652              339,886            73,989           413,875

Total costs and expenses                 6,545,414         4,183,048        10,728,462            6,932,602         4,184,772        11,117,374

Operating loss                          (2,030,803 )      (4,183,048 )      (6,213,851 )         (3,200,251 )      (4,184,772 )      (7,385,023 )

Other income (expense):
Rent and other income                       56,535         3,651,677         3,708,212               20,791           958,428           979,219
Interest income                                 -            678,964           678,964                   -            936,615           936,615
Interest expense                          (414,661 )          (1,281 )        (415,942 )           (429,891 )          (8,832 )        (438,723 )

Total other income (expense),
net                                       (358,126 )       4,329,360         3,971,234             (409,100 )       1,886,211         1,477,111

Loss before income taxes from
continuing operations              $    (2,388,929 )    $    146,312        (2,242,617 )    $    (3,609,351 )    $ (2,298,561 )      (5,907,912 )

Benefit for income taxes                                                            -                                                        -

Loss from continuing operations                                             (2,242,617 )                                             (5,907,912 )
Discontinued operations, net of
income taxes                                                                   378,348                                               (1,266,126 )
Loss on disposal of discontinued
operations, net of income taxes                                                     -                                                  (229,201 )

Net loss                                                                    (1,864,269 )                                             (7,403,239 )
Less: Net loss attributable to
noncontrolling interest                                                          2,804                                                  133,287

Net loss attributable to Dynacq
Healthcare, Inc.                                                          $ (1,861,465 )                                           $ (7,269,952 )

Operational statistics (Number
of medical procedures) for
Pasadena facility:
Inpatient:
Bariatric                                       42                                                       50
Orthopedic                                       7                                                        8
Other                                           27                                                       51

Total inpatient procedures                      76                                                      109

Outpatient:
Orthopedic                                      93                                                       70
Other                                          390                                                      302

Total outpatient procedures                    483                                                      372

Total procedures                               559                                                      481


Table of Contents

Three Months Ended May 31, 2013 Compared to the Three Months Ended May 31, 2012

U.S. Division

Through May 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, when the payments were made, the carriers requested refunds of the payments made in the event that the SOAH decisions and orders were reversed on appeal (which they were). Our request that the TDWC Commissioner enforce the awards which were not voluntarily paid by the carriers was refused in approximately 130 cases. As a result of the reversal of the SOAH decisions and orders, Texas Mutual Insurance Company and other carriers filed petitions in Travis County district court seeking a refund in cases in which the awards were voluntarily paid. The district court found in favor of Texas Mutual and the Company was 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 did not object to the reversal and remand of the SOAH decisions and orders, but did object to the judgments ordering refunds and those judgments were appealed to the Third Court of Appeals. As part of the appeals, the Company deposited the amounts that were ordered to be refunded as cash deposits into the registry of the court in order to stay execution of the judgments ordering refunds. On June 6, 2013, the judgments ordering refunds were reversed by the Court of Appeals. The Court of Appeals held that if Texas Mutual wants a refund, it must pursue the refund demand administratively through the TDWC rather than through the district courts. If the Court of Appeals' decision holds, the money deposited into the registry of the court will be refunded to the Company. At this time, Texas Mutual has not decided whether to file a motion for rehearing in the Court of Appeals or file a petition for review with the Supreme Court of Texas. Should Texas Mutual be successful in reversing the Court of Appeals' decision, 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 May 31, 2013, the Company has accrued this amount of $7.8 million, and an additional amount of $2.0 million in interest payable, as accrued liabilities. If the Court of Appeals' decision holds, we do not anticipate that any other carriers will pursue refund demands through district court but instead will pursue them administratively through TDWC. The cases in which the SOAH decisions and orders were reversed have been or are being remanded to TDWC for determinations of whether the services provided were unusually costly and unusually extensive. 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 $638,100, or 69%, from $920,662 to $1,558,762, and total surgical cases increased by 7% from 179 cases for the quarter ended May 31, 2012 to 191 cases for the quarter ended May 31, 2013. While the number of cases increased by 7%, net patient service revenue increased by 69%, 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 $75,218, or 3%, from $2,408,393 for the quarter ended May 31, 2012 to $2,333,175 for the quarter ended May 31, 2013. The following discusses the various changes in costs and expenses:

Compensation and benefits decreased by $132,656, or 12%, primarily associated with reduction in workforce.

Medical services and supplies expenses increased by $3,073, or 1%, primarily due to a 7% increase in the number of cases.

Other operating expenses increased by $61,459, or 9%, primarily associated with increased revenue.

Other income (expense) for the quarters ended May 31, 2013 and 2012 includes interest expense of $(135,169) and $(141,073), respectively, primarily associated with the stop-loss cases discussed above.


Table of Contents

Corporate Division

Compensation and benefits for the Corporate Division includes all corporate personnel compensation and benefits. It also includes $49,341 and $46,136 of non-cash compensation expense for the quarters ended May 31, 2013 and 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 58%. The compensation expense is lower in the current period due to (a) a reduction in the number of corporate staff, including marketing personnel; and (b) a bonus accrual in the prior period of $300,000 payable to the former chief financial officer.

Other operating expenses include all corporate general and administrative expenses, including other professional fees such as legal expenses and audit expenses. It increased by $13,041, from $353,881 for the quarter ended May 31, 2012 to $366,922 for the quarter ended May 31, 2013, primarily due to higher legal expenses.

Rent and other income increased by $468,758, from $(295,046) in net expense for the quarter ended May 31, 2012 to $173,712 for the quarter ended May 31, 2013. Rent and other income for the quarter ended May 31, 2013 includes (a) a gain of $174,677 in trading securities; (b) an amount of $20,170 in foreign currency losses; and (c) miscellaneous other income of $19,205. Rent and other income for the quarter ended May 31, 2012 includes (a) foreign currency losses of $178,597, primarily on investments in Euro bonds; and (2) a loss of $149,625 in trading securities; and (c) miscellaneous other income of $33,176.

Interest income of $203,310 and $348,924 for the quarters ended May 31, 2013 and 2012, respectively, are primarily related to the Company's investments in bonds.

Investments in securities

The Company's investments in debt instruments (corporate and municipal bonds) are recorded at fair value based on quoted market prices that are traded in less active markets or priced using a quoted market price for similar investments or are priced using non-binding market consensus prices that can be corroborated by observable market data (Level 2). These investments are classified as available-for-sale securities. As of May 31, 2013, these securities are valued at approximately $17.2 million. Unrealized gains in these investments of $9.2 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at May 31, 2013. During the quarters ended May 31, 2013 and 2012, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains (losses) of $174,677 and $(149,625), 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 May 31, 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 July 2013. Net patient service revenue for the quarter ended May 31, 2013 was $84,528, 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 May 31, 2012 was $24,886.

Total costs and expenses for the Garland facility for the quarters ended May 31, 2013 and 2012 was $73,200 and $349,437, 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 $59,558 for the quarter ended May 31, 2012.

Income Taxes

For the quarters ended May 31, 2013 and 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.


Table of Contents

Nine Months Ended May 31, 2013 Compared to the Nine Months Ended May 31, 2012

U.S. Division

Through May 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, when the payments were made, the carriers requested refunds of the payments made in the event that the SOAH decisions and orders were reversed on appeal (which they were). Our request that the TDWC Commissioner enforce the awards which were not voluntarily paid by the carriers was refused in approximately 130 cases. As a result of the reversal of the SOAH decisions and orders, Texas Mutual Insurance Company and other carriers filed petitions in Travis County district court seeking a refund in cases in which the awards were voluntarily paid. The district court found in favor of Texas Mutual and the Company was 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 did not object to the reversal and remand of the SOAH decisions and orders, but did object to the judgments ordering refunds and those judgments were appealed to the Third Court of Appeals. As part of the appeals, the Company deposited the amounts that were ordered to be refunded as cash deposits into the registry of the court in order to stay execution of the judgments ordering refunds. On June 6, 2013, the judgments ordering refunds were reversed by the Court of Appeals. The Court of Appeals held that if Texas Mutual wants a refund, it must pursue the refund demand administratively through the TDWC rather than through the district courts. If the Court of Appeals' decision holds, the money deposited into the registry of the court will be refunded to the Company. At this time, Texas Mutual has not decided whether to file a motion for rehearing in the Court of Appeals or file a petition for review with the Supreme Court of Texas. Should Texas Mutual be successful in reversing the Court of Appeals' decision, 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 May 31, 2013, the Company has accrued this amount of $7.8 million, and an additional amount of $2.0 million in interest payable, as accrued liabilities. If the Court of Appeals' decision holds, we do not anticipate that any other carriers will pursue refund demands through district court but instead will pursue them administratively through TDWC. The cases in which the SOAH decisions and orders were reversed have been or are being remanded to TDWC for determinations of whether the services provided were unusually costly and unusually extensive. 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 $782,260, or 21%, from $3,732,351 to $4,514,611, and total surgical cases increased by 16% from 481 cases for the nine months ended May 31, 2012 to 559 cases for the nine months ended May 31, 2013. While the number of cases increased by 16%, net patient service revenue increased by 21%, primarily due to a change in the surgical mix of cases.

Total costs and expenses decreased by $387,188, or 6%, from $6,932,602 for the nine months ended May 31, 2012 to $6,545,414 for the nine months ended May 31, 2013. The following discusses the various changes in costs and expenses:

Compensation and benefits decreased by $246,942, or 8%, primarily associated with reduction in workforce.

Medical services and supplies expenses increased by $206,973, or 20%, primarily due to a 16% increase in the number of cases, and also due to write-off of obsolete supplies.

Other operating expenses decreased by $343,475, or 14%, primarily due to efforts made by the Company to reduce costs.

Other income (expense) for the nine months ended May 31, 2013 and 2012 includes interest expense of $(414,661) and $(429,891), respectively, primarily associated with the stop-loss cases discussed above.


Table of Contents

Corporate Division

Compensation and benefits for the Corporate Division includes all corporate personnel compensation and benefits. It also includes $60,121 and $196,070 of non-cash compensation expense for the nine months ended May 31, 2013 and 2012, respectively, related to employees' incentive stock options granted in fiscal years 2007, 2011 and 2012. The lower expense during the nine months ended May 31, 2013 is the result of 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 48%. The compensation expense is lower in the current period due to (a) a reduction in the number of corporate staff, including marketing personnel; (b) the Company incurred a non-cash compensation charge in 2012 of $50,000 for issuance of common stock to an employee; (c) the Company paid the former chief financial officer an additional compensation of $77,000 in 2012; and (d) a bonus accrual of $300,000 in the prior year payable to the former chief financial officer.

Other operating expenses include all corporate general and administrative expenses, including other professional fees such as legal expenses and audit expenses. It increased by $1,503,803, from $1,159,116 for the nine months ended May 31, 2012 to $2,662,919 for the nine months ended May 31, 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 $2,693,249, from $958,428 for the nine months ended May 31, 2012 to $3,651,677 for the nine months ended May 31, 2013. Rent and other income for the nine months ended May 31, 2013 includes (a) a gain of $2,199,500 on a bond called during the current period, (b) a gain of $480,108 on the sale of the apartment in Hong Kong, (c) an amount of $143,482 in foreign currency gains, (d) a gain of $706,350 in trading securities, and
(e) miscellaneous other income of $122,237. Rent and other income for the nine months ended May 31, 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 nine months ended May 31, 2012 upon the return of investments from the Company's foreign subsidiaries in China.); (b) a loss of $206,726 in trading securities;
(c) foreign currency exchange losses of $356,670, primarily on investments in Euro bonds; and (d) miscellaneous other income of $99,234.

Interest income of $678,964 and $936,615 for the nine months ended May 31, 2013 and 2012, respectively, are primarily related to the Company's investments in bonds.

Investments in securities

The Company's investments in debt instruments (corporate and municipal bonds) are recorded at fair value based on quoted market prices that are traded in less . . .

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