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DYII > SEC Filings for DYII > Form 10-Q on 11-Apr-2014All Recent SEC Filings

Show all filings for DYNACQ HEALTHCARE INC

Form 10-Q for DYNACQ HEALTHCARE INC


11-Apr-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 and six months ended February 28, 2014. 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 February 28, 2014              Three Months Ended February 28, 2013
                                               U.S.                                         U.S.
                                           Division      Corporate         Total          Division        Corporate         Total
Net patient service revenue           $   2,231,387      $        -     $ 2,231,387     $   1,437,822     $        -     $  1,437,822
Costs and expenses:
Compensation and benefits                   948,688         643,760       1,592,448           922,853        472,087        1,394,940
Medical services and supplies               304,093               -         304,093           374,986              -          374,986
Other operating expenses                    810,209         236,053       1,046,262           671,645        450,686        1,122,331
Depreciation and amortization                85,532           1,003          86,535           115,747          5,996          121,743
Total costs and expenses                  2,148,522         880,816       3,029,338         2,085,231        928,769        3,041,000
Operating income (loss)                      82,865        (880,816 )      (797,951 )        (647,409 )     (928,769 )     (1,576,178 )
Other income (expense):
Rent and other income                        21,714         119,850         141,564             4,652        557,327          561,979
Interest income                                   -         224,292         224,292                 -        170,840          170,840
Interest expense                            (79,047 )        (6,423 )       (85,470 )        (139,512 )            -         (139,512 )
Total other income (expense), net           (57,333 )       337,719         280,386          (134,860 )      728,167          593,307
Income (loss) before income taxes
from continuing
operations                            $      25,532      $ (543,097 )      (517,565 )   $    (782,269 )   $ (200,602 )       (982,871 )
Benefit for income taxes                                                          -                                                 -
Loss from continuing operations                                            (517,565 )                                        (982,871 )
Discontinued operations, net of
income taxes                                                                      -                                           128,728
Net loss                                                                   (517,565 )                                        (854,143 )
Less: Net income attributable to
noncontrolling interest                                                         (59 )                                             (25 )
Net loss attributable to Dynacq
Healthcare, Inc.                                                        $  (517,624 )                                    $   (854,168 )

Operational statistics (Number of
medical procedures) for Pasadena
facility:
Inpatient:
Bariatric                                        15                                                16
Orthopedic                                        5                                                 1
Other                                             8                                                 9
Total inpatient procedures                       28                                                26
Outpatient:
Orthopedic                                       77                                                31
Other                                           102                                               108
Total outpatient procedures                     179                                               139
Total procedures                                207                                               165

                                           Six Months Ended February 28, 2014                 Six Months Ended February 28, 2013
                                             U.S.                                           U.S.
                                         Division      Corporate          Total           Division        Corporate          Total
Net patient service revenue           $ 4,490,634     $          -     $  4,490,634     $  2,955,849     $          -     $  2,955,849
Costs and expenses:
Compensation and benefits               1,891,254        1,152,961        3,044,215        1,815,140          968,624        2,783,764
Medical services and supplies             921,563                -          921,563          770,526                -          770,526
Other operating expenses                1,646,632          512,108        2,158,740        1,398,585        2,295,997        3,694,582
Depreciation and amortization             192,839            2,005          194,844          227,988           17,507          245,495
Total costs and expenses                4,652,288        1,667,074        6,319,362        4,212,239        3,282,128        7,494,367
Operating loss                           (161,654 )     (1,667,074 )     (1,828,728 )     (1,256,390 )     (3,282,128 )     (4,538,518 )
Other income (expense):
Rent and other income                      31,558          385,551          417,109           53,105        3,477,965        3,531,070
Interest income                                 -          426,615          426,615                -          475,654          475,654
Interest expense                         (222,330 )        (19,092 )       (241,422 )       (279,492 )         (1,281 )       (280,773 )
Total other income (expense), net        (190,772 )        793,074          602,302         (226,387 )      3,952,338        3,725,951
Income (loss) before income taxes
from continuing operations            $  (352,426 )   $   (874,000 )     (1,226,426 )   $ (1,482,777 )   $    670,210         (812,567 )
Benefit for income taxes                                                          -                                                  -
Loss from continuing operations                                          (1,226,426 )                                         (812,567 )
Discontinued operations, net of
income taxes                                                                      -                                            370,086
Net loss                                                                 (1,226,426 )                                         (442,481 )
Less: Net (income) loss
attributable to noncontrolling
interest                                                                        (33 )                                            2,773
Net loss attributable to Dynacq
Healthcare, Inc.                                                       $ (1,226,459 )                                     $   (439,708 )

Operational statistics (Number of
medical procedures) for Pasadena
facility:
Inpatient:
Bariatric                                      35                                                 26
Orthopedic                                     18                                                  3
Other                                          13                                                 21
Total inpatient procedures                     66                                                 50
Outpatient:
Orthopedic                                    141                                                 65
Other                                         241                                                253
Total outpatient procedures                   382                                                318
Total procedures                              448                                                368

Three Months Ended February 28, 2014 Compared to the Three Months Ended February 28, 2013

U.S. Division

Due to the uncertainties associated with the stop-loss fee dispute cases, the Company has accrued an amount of $11.3 million, and an additional amount of $3.3 million in interest payable as accrued liabilities. For a detailed discussion of this, see Revenue Recognition discussed in Item 1 - Notes to Consolidated Financial Statements.

Net patient service revenue increased by $793,565, or 55%, from $1,437,822 to $2,231,387, and total surgical cases increased by 25% from 165 cases for the three months ended February 28, 2013 to 207 cases for the three months ended February 28, 2014. While the number of cases increased by 25%, net patient service revenue increased by 55%, primarily due to a change in the surgical mix of cases.

Total costs and expenses increased by $63,291, or 3%, from $2,085,231 for the three months ended February 28, 2013 to $2,148,522 for the three months ended February 28, 2014. The following discusses the various changes in costs and expenses:

Compensation and benefits increased by $25,835, or 3%, primarily associated with increase in workforce due to higher net patient service revenues.

Medical services and supplies expenses decreased by $70,893, primarily due to a change in the surgical mix of cases.

Other operating expenses increased by $138,564, or 21%, primarily associated with higher net patient service revenues.

Other expense for the three months ended February 28, 2014 and 2013 of $57,333 and $134,860, 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, and it increased from $472,087 for the three months ended February 28, 2013 to $643,760 for the three months ended February 28, 2014, primarily due to an increase in marketing personnel. Compensation and benefits also includes $49,341 and $44,327 of non-cash compensation expense for the three months ended February 28, 2014 and 2013, respectively, related to employees' incentive stock options granted in fiscal years 2007, 2011 and 2012. Other operating expenses include all corporate general and administrative expenses, including other professional fees such as legal expenses and audit expenses. It decreased by $214,633, from $450,686 for the three months ended February 28, 2013 to $236,053 for the three months ended February 28, 2014. The decrease in other operating expenses is due to a decrease in legal and other professional fees primarily relating to the internal investigation described in note 12 to our consolidated financial statements for the fiscal year ended August 31, 2013.

Rent and other income decreased by $437,477, from $557,327 for the three months ended February 28, 2013 to $119,850 for the three months ended February 28, 2014. Rent and other income for the three months ended February 28, 2014 includes (a) an amount of $11,155 in foreign currency gains, and (b) miscellaneous other income of $108,695. Rent and other income for the three months 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.

Interest income of $224,292 and $170,840 for the three months ended February 28, 2014 and 2013, 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 February 28, 2014, these securities are valued at approximately $20.1 million. Unrealized gains in these investments of $12.0 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at February 28, 2014. During the three months ended February 28, 2013, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains of $473,295. During the first quarter of the current fiscal year, the Company sold all of its trading securities and did not hold any such securities as of February 28, 2014.

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 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.

Income Taxes

The Company did not recognize a benefit or provision for income taxes for the three months ended February 28, 2014 and 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 its deferred tax assets.

Six Months Ended February 28, 2014 Compared to the Six Months Ended February 28, 2013

U.S. Division

Due to the uncertainties associated with the stop-loss fee dispute cases, the Company has accrued an amount of $11.3 million, and an additional amount of $3.3 million in interest payable as accrued liabilities. For a detailed discussion of this, see Revenue Recognition discussed in Item 1 - Notes to Consolidated Financial Statements.

Net patient service revenue increased by $1,543,785, or 52%, from $2,955,849 to $4,490,634, and total surgical cases increased by 22% from 368 cases for the six months ended February 28, 2013 to 448 cases for the six months ended February 28, 2014. While the number of cases increased by 22%, net patient service revenue increased by 52%, primarily due to a change in the surgical mix of cases.

Total costs and expenses increased by $440,049, or 10%, from $4,212,239 for the six months ended February 28, 2013 to $4,652,288 for the six months ended February 28, 2014. The following discusses the various changes in costs and expenses:

Compensation and benefits increased by $76,114, or 4%, primarily associated with increase in workforce due to higher net patient service revenues.

Medical services and supplies expenses increased by $151,037, primarily due to a 22% increase in the number of cases and also due to a change in the surgical mix of cases.

Other operating expenses increased by $248,047, or 18%, primarily associated with higher net patient service revenues.

Other expense for the six months ended February 28, 2014 and 2013 of $190,772 and $226,387, 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, and it increased from $968,624 for the six months ended February 28, 2013 to $1,152,961 for the six months ended February 28, 2014, primarily due to an increase in marketing personnel. Compensation and benefits also includes $98,682 and $10,780 of non-cash compensation expense for the six months ended February 28, 2014 and 2013, respectively, related to employees' incentive stock options granted in fiscal years 2007, 2011 and 2012.

Other operating expenses include all corporate general and administrative expenses, including other professional fees such as legal expenses and audit expenses. It decreased by $1,783,889, from $2,295,997 for the six months ended February 28, 2013 to $512,108 for the six months ended February 28, 2014. The decrease in other operating expenses is due to a decrease in legal and other professional fees primarily relating to the internal investigation described in note 12 to our consolidated financial statements for the fiscal year ended August 31, 2013.

Rent and other income decreased by $3,092,414, from $3,477,965 for the six months ended February 28, 2013 to $385,551 for the six months ended February 28, 2014. Rent and other income for the six months ended February 28, 2014 includes
(a) an amount of $84,630 in foreign currency gains, (b) a gain of $161,864 in trading securities, and (b) miscellaneous other income of $139,057. 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

Interest income of $426,615 and $475,654 for the six months ended February 28, 2014 and 2013, 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 February 28, 2014, these securities are valued at approximately $20.1 million. Unrealized gains in these investments of $12.0 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at February 28, 2014. During the six months ended February 28, 2014 and 2013, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains of $161,864 and $531,673, respectively. During the first quarter of the current fiscal year, the Company sold all of its trading securities and did not hold any such securities as of February 28, 2014.

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 six months ended February 28, 2013 was $402,158, 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 six months ended February 28, 2014 and 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 its deferred tax assets.

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 provided by operating activities for continuing activities was $2,702,193 during the six months ended February 28, 2014, primarily due to an increase in accounts payable and accrued liabilities of $4,219,321. The increase in these liabilities is due to receipt of refunds on deposits of approximately $4,476,097 made earlier with the Travis County District Court in relation to the stop-loss cases discussed above. Partially offsetting this cash inflow were (a) a net loss before discontinued operations of $1,226,426, (b) an increase in accounts receivable of $379,557, and (c) a gain of $161,864 in trading securities.

Cash flows from investing activities

Cash flow provided by investing activities for continuing activities was $1,127,207, 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 $121,820 for payments on capital leases and notes payable.

The Company had working capital of $2,677,129 as of February 28, 2014 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 herein by reference.

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