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DYII > SEC Filings for DYII > Form 10-Q on 14-Jan-2014All Recent SEC Filings

Show all filings for DYNACQ HEALTHCARE INC

Form 10-Q for DYNACQ HEALTHCARE INC


14-Jan-2014

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, 2013. 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, 2013.

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 three months ended November 30, 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, 2013.

Results of Operations

                                        Three Months Ended November 30, 2013          Three Months Ended November 30, 2012
                                         U.S.                                         U.S.
                                       Division       Corporate        Total        Division       Corporate         Total
Net patient service revenue          $   2,259,247   $         -   $   2,259,247   $ 1,518,027   $           -   $   1,518,027
Costs and expenses:
Compensation and benefits                  942,566       509,201       1,451,767       892,287         496,537       1,388,824
Medical services and supplies              617,470             -         617,470       395,540               -         395,540
Other operating expenses                   836,423       276,055       1,112,478       726,940       1,845,311       2,572,251
Depreciation and amortization              107,307         1,002         108,309       112,241          11,511         123,752
Total costs and expenses                 2,503,766       786,258       3,290,024     2,127,008       2,353,359       4,480,367
Operating loss                           (244,519)     (786,258)     (1,030,777)     (608,981)     (2,353,359)     (2,962,340)
Other income (expense):
Rent and other income                        9,844       265,701         275,545        48,453       2,920,638       2,969,091
Interest income                                  -       202,323         202,323             -         304,814         304,814
Interest expense                         (143,283)      (12,669)       (155,952)     (139,980)         (1,281)       (141,261)
Total other income (expense), net        (133,439)       455,355         321,916      (91,527)       3,224,171       3,132,644
Income (loss) before income taxes
from continuing operations           $   (377,958)   $ (330,903)       (708,861)   $ (700,508)   $     870,812         170,304
Provision (benefit) for income
taxes                                                                          -                                             -
Income (loss) from continuing
operations                                                             (708,861)                                       170,304
Discontinued operations, net of
income taxes                                                                   -                                       241,358
Net income (loss)                                                      (708,861)                                       411,662
Less: Net loss attributable to
noncontrolling interest                                                       26                                         2,798
Net income (loss) attributable to
Dynacq Healthcare, Inc.                                            $   (708,835)                                 $     414,460

Operational statistics (Number of
medical procedures) for Pasadena
   facility:
Inpatient:
Bariatric                                       20                                          10
Orthopedic                                      13                                           2
Other                                            5                                          12
Total inpatient procedures                      38                                          24
Outpatient:
Orthopedic                                      64                                          34
Other                                          139                                         145
Total outpatient procedures                    203                                         179
Total procedures                               241                                         203

Three Months Ended November 30, 2013 Compared to the Three Months Ended November 30, 2012

U.S. Division

Through November 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. Texas Mutual filed a motion for rehearing with the Court of Appeals which ultimately was denied. The Company has filed motions in all 47 cases with the district court asking that the district clerk be ordered to release the deposited funds to the Company. On December 16, 2013, orders directing the district clerk to disburse the funds were presented to the district court. These orders were signed, and in January 2014, the Company received the deposits and accrued interest. In addition, Texas Mutual filed three additional petitions in district court for cases that were left out of the original 47. The court granted Texas Mutual's petitions and ordered the Company to refund approximately $300,000, including prejudgment interest to Texas Mutual. These judgments were granted before the Court of Appeals reversed the district court's original judgments. These three cases have been appealed to the Court of Appeals and the funds ordered refunded have been deposited with the district clerk. The Court of Appeals has reversed the district court's final judgments in these three cases and the Company has filed motions with the district court asking that the district clerk be ordered to release the deposited funds to the Company. During the time that the carriers' petitions seeking refunds were pending, because of the uncertainty of the results at that time, as of November 30, 2013, the Company has accrued the total potential refund amount of $7.8 million, and an additional amount of $2.3 million in interest payable, as accrued liabilities. 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. After the reversal of the judgments it obtained from the district court ordering refunds, on December 4, 2013, Texas Mutual made a formal request to the Commissioner of Workers' Compensation that he administratively order the Company to make refunds to Texas Mutual (in the same amount that was sought in the district court). The Company responded to this request on December 11, 2013, asking that it be denied. The matter is pending at this time. As to the matters remanded to TDWC and SOAH, 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 many of the underlying stop-loss fee disputes and that payments refunded to the carriers will be recaptured.

Net patient service revenue increased by $741,220, or 49%, from $1,518,027 to $2,259,247, and total surgical cases increased by 19% from 203 cases for the three months ended November 30, 2012 to 241 cases for the three months ended November 30, 2013. While the number of cases increased by 19%, net patient service revenue increased by 49%, primarily due to a change in the surgical mix of cases.

Total costs and expenses increased by $376,758, or 18%, from $2,127,008 for the three months ended November 30, 2012 to $2,503,766 for the three months ended November 30, 2013. The following discusses the various changes in costs and expenses:

Compensation and benefits increased by $50,279, or 6%, primarily associated with increase in workforce due to higher net patient service revenues.

Medical services and supplies expenses increased by $221,930, or 56%, primarily due to a 19% increase in the number of cases, and also due to a change in the surgical mix of cases. The gross billed charges increased by 52%.

Other operating expenses increased by $109,483, or 15%, primarily associated with higher net patient service revenues.

Other expense for the three months ended November 30, 2013 and 2012 of $133,439 and $91,527, respectively, includes interest expense 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 $49,341 and $(33,547) of non-cash compensation expense for the three months ended November 30, 2013 and 2012, respectively, related to employees' incentive stock options granted in fiscal years 2007, 2011 and 2012. The negative expense during the three months ended November 30, 2012 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, of 13% is primarily due to a reduction in corporate staff.

Other operating expenses include all corporate general and administrative expenses, including other professional fees such as legal expenses and audit expenses. It decreased by $1,569,256, from $1,845,311 for the three months ended November 30, 2012 to $276,055 for the three months ended November 30, 2013. The decrease in other operating expenses is due to a significant decrease in legal and other professional fees by approximately $1,312,000 primarily for the internal investigation discussed in note 12 to our consolidated financial statements for the fiscal year ended August 31, 2013.

Rent and other income decreased by $2,654,937, from $2,920,638 for the three months ended November 30, 2012 to $265,701 for the three months ended November 30, 2013. Rent and other income for the three months ended November 30, 2013 includes (a) an amount of $73,475 in foreign currency gains, (b) a gain of $161,864 in trading securities, and (e) miscellaneous other income of $30,362. Rent and other income for the three months ended November 30, 2012 includes (a) a gain of $2,199,500 on a bond called during the period, (b) a gain of $480,108 on the sale of the apartment in Hong Kong, (c) an amount of $139,280 in foreign currency gains, (d) a gain of $58,378 in trading securities, and (e) miscellaneous other income of $43,372.

Interest income of $202,323 and $304,814 for the three months ended November 30, 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 November 30, 2013, these securities are valued at approximately $19.3 million. Unrealized gains in these investments of $11.2 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at November 30, 2013. During the three months ended November 30, 2013 and 2012, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains of $161,864 and $58,378, respectively. During the current period, the Company sold all of its trading securities and does not hold any such securities as of November 30, 2013.

Discontinued Operations

The Company closed the Garland facility on September 30, 2011, and sold it in July 2013. The Company took an impairment charge of approximately $1.1 million during the three months ended August 31, 2012, based on the sales price negotiated at that time. An additional loss of $122,975 was taken based on the final sales price during the three months ended August 31, 2013. Net patient service revenue for the three months ended November 30, 2012 was $210,825, due to receipts on old accounts receivable that were fully reserved earlier per the Company's revenue recognition policy.

Income Taxes

The Company did not recognize a benefit or provision for income taxes for the three months ended November 30, 2013, 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. For the three months ended November 30, 2012, the Company did not recognize any provision for income taxes since the Company anticipated to incur a loss for the fiscal year ended August 31, 2013, and it also had net operating loss carry forward.

Liquidity and Capital Resources

Our fiscal year 2013 Annual Report on Form 10-K includes a detailed discussion of our liquidity, contractual obligations and commitments. The information presented below updates and should be read in conjunction with the information disclosed in that Form 10-K.

Cash flow from operating activities

Cash flow used in operating activities for continuing activities was $1,275,281 during the three months ended November 30, 2013, primarily due to (a) a net loss before discontinued operations of $708,861, (b) an increase in accounts receivable of $618,673, and (c) a gain of $161,864 in trading securities. Partially offsetting these cash outflows were (a) depreciation and amortization of $108,309, and (b) an increase in accounts payable and accrued liabilities of $115,517.

Cash flows from investing activities

Cash flow provided by investing activities for continuing activities was $1,209,798, primarily due to sales proceeds of $1,233,286 in trading securities.

Cash flows from financing activities

Cash flow used in financing activities for continuing activities was $41,097 for payments on capital leases and notes payable.

The Company had working capital of $3,204,679 as of November 30, 2013 and maintained a liquid position by a current ratio of approximately 1.2 to 1.

We believe we will be able to meet our ongoing liquidity and cash needs for at least the next twelve months based on the amount of available cash and cash equivalents.

Recent Accounting Pronouncements

See notes to the Consolidated Financial Statements - Recent Accounting Pronouncements, which is incorporated here by reference.

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