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

Show all filings for DYNACQ HEALTHCARE INC

Form 10-Q for DYNACQ HEALTHCARE INC


11-Jul-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 nine months ended May 31, 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 May 31, 2014                 Three Months Ended May 31, 2013
                                     U.S.                                       U.S.
                                 Division      Corporate        Total         Division       Corporate         Total
Net patient service revenue   $ 2,748,772     $        -     $ 2,748,772     $ 1,558,762     $        -     $  1,558,762
Costs and expenses:
Compensation and benefits       1,037,457        551,161       1,588,618         983,010        532,995        1,516,005
Medical services and
supplies                          532,021              -         532,021         463,715              -          463,715
Other operating expenses          855,476        302,705       1,158,181         778,296        366,922        1,145,218
Depreciation and
amortization                       84,785          1,003          85,788         108,154          1,003          109,157
Total costs and expenses        2,509,739        854,869       3,364,608       2,333,175        900,920        3,234,095
Operating income (loss)           239,033       (854,869 )      (615,836 )      (774,413 )     (900,920 )     (1,675,333 )
Other income (expense):
Rent and other income              44,644        150,131         194,775           3,430        173,712          177,142
Interest income                         -        226,705         226,705               -        203,310          203,310
Interest expense                  (96,723 )       (8,390 )      (105,113 )      (135,169 )            -         (135,169 )
Total other income
(expense), net                    (52,079 )      368,446         316,367        (131,739 )      377,022          245,283
Income (loss) before income
taxes from continuing
operations                    $   186,954     $ (486,423 )      (299,469 )   $  (906,152 )   $ (523,898 )     (1,430,050 )
Benefit for income taxes                                               -                                               -
Loss from continuing
operations                                                      (299,469 )                                    (1,430,050 )
Discontinued operations,
net of income taxes                                                    -                                           8,262
Net loss                                                        (299,469 )                                    (1,421,788 )
Less: Net loss attributable
to noncontrolling interest                                            29                                              31
Net loss attributable to
Dynacq Healthcare, Inc.                                      $  (299,440 )                                  $ (1,421,757 )

Operational statistics
(Number of medical
procedures) for Pasadena
facility:
Inpatient:
Bariatric                              15                                             16
Orthopedic                             14                                              4
Other                                   6                                              6
Total inpatient procedures             35                                             26
Outpatient:
Orthopedic                             56                                             28
Other                                 130                                            137
Total outpatient procedures           186                                            165
Total procedures                      221                                            191

                                        Nine Months Ended May 31, 2014                     Nine Months Ended May 31, 2013
                                       U.S.                                            U.S.
                                   Division         Corporate        Total           Division         Corporate          Total
Net patient service revenue     $ 7,239,406     $           -     $  7,239,406     $  4,514,611      $          -     $  4,514,611
Costs and expenses:
Compensation and benefits         2,928,711         1,704,122        4,632,833        2,798,150         1,501,619        4,299,769
Medical services and supplies     1,453,584                 -        1,453,584        1,234,241                 -        1,234,241
Other operating expenses          2,502,108           814,813        3,316,921        2,176,881         2,662,919        4,839,800
Depreciation and amortization       277,624             3,008          280,632          336,142            18,510          354,652
Total costs and expenses          7,162,027         2,521,943        9,683,970        6,545,414         4,183,048       10,728,462
Operating income (loss)              77,379        (2,521,943 )     (2,444,564 )     (2,030,803 )      (4,183,048 )     (6,213,851 )
Other income (expense):
Rent and other income                76,202           535,682          611,884           56,535         3,651,677        3,708,212
Interest income                           -           653,320          653,320                -           678,964          678,964
Interest expense                   (319,053 )         (27,482 )       (346,535 )       (414,661 )          (1,281 )       (415,942 )
Total other income (expense),
net                                (242,851 )       1,161,520          918,669         (358,126 )       4,329,360        3,971,234
Income (loss) before income
taxes from continuing
operations                      $  (165,472 )   $  (1,360,423 )     (1,525,895 )   $ (2,388,929 )   $     146,312       (2,242,617 )
Benefit for income taxes                                                     -                                                   -
Loss from continuing
operations                                                          (1,525,895 )                                        (2,242,617 )
Discontinued operations, net
of income taxes                                                              -                                             378,348
Net loss                                                            (1,525,895 )                                        (1,864,269 )
Less: Net (income) loss
attributable to
noncontrolling interest                                                     (4 )                                             2,804
Net loss attributable to
Dynacq Healthcare, Inc.                                           $ (1,525,899 )                                      $ (1,861,465 )

Operational statistics
(Number of medical
procedures) for Pasadena
facility:
Inpatient:
Bariatric                                50                                                  42
Orthopedic                               32                                                   7
Other                                    19                                                  27
Total inpatient procedures              101                                                  76
Outpatient:
Orthopedic                              197                                                  93
Other                                   371                                                 390
Total outpatient procedures             568                                                 483
Total procedures                        669                                                 559

Three Months Ended May 31, 2014 Compared to the Three Months Ended May 31, 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 $3.4 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 $1,190,010, or 76%, from $1,558,762 to $2,748,772, and total surgical cases increased by 16% from 191 cases for the three months ended May 31, 2013 to 221 cases for the three months ended May 31, 2014. While the number of cases increased by 16%, net patient service revenue increased by 76%, primarily due to a change in the surgical mix of cases, and also due to collections on old accounts receivable that were fully reserved for.

Total costs and expenses increased by $176,564, or 8%, from $2,333,175 for the three months ended May 31, 2013 to $2,509,739 for the three months ended May 31, 2014. The following discusses the various changes in costs and expenses:

Compensation and benefits increased by $54,447, or 6%, primarily associated with increase in workforce due to higher net patient service revenues.

Medical services and supplies expenses increased by $68,306 or 15%, primarily due to a 16% increase in the number of cases and also due to a change in the surgical mix of cases.

Other operating expenses increased by $77,180, or 10%, primarily associated with higher net patient service revenues.

Other expense for the three months ended May 31, 2014 and 2013 of $52,079 and $131,739, 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 $532,995 for the three months ended May 31, 2013 to $551,161 for the three months ended May 31, 2014, primarily due to an increase in marketing personnel. Compensation and benefits also includes $49,341 of non-cash compensation expense for each of the three months ended May 31, 2014 and 2013, 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 $64,217, from $366,922 for the three months ended May 31, 2013 to $302,705 for the three months ended May 31, 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 $23,581, from $173,712 for the three months ended May 31, 2013 to $150,131 for the three months ended May 31, 2014. Rent and other income for the three months ended May 31, 2014 includes (a) an amount of $9,791 in foreign currency losses, and (b) miscellaneous other income of $159,922. Rent and other income for the three months 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.

Interest income of $226,705 and $203,310 for the three months ended May 31, 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 May 31, 2014, these securities are valued at approximately $21.3 million. Unrealized gains in these investments of $13.1 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at May 31, 2014. During the three months ended May 31, 2013, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains of $174,677. 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 May 31, 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 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.

Income Taxes

The Company did not recognize a benefit or provision for income taxes for the three months ended May 31, 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.

Nine Months Ended May 31, 2014 Compared to the Nine Months Ended May 31, 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 $3.4 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 $2,724,795, or 60%, from $4,514,611 to $7,239,406, and total surgical cases increased by 20% from 559 cases for the nine months ended May 31, 2013 to 669 cases for the nine months ended May 31, 2014. While the number of cases increased by 20%, net patient service revenue increased by 60%, primarily due to a change in the surgical mix of cases and also due to collections on old accounts receivable that were fully reserved for.

Total costs and expenses increased by $616,613, or 9%, from $6,545,414 for the nine months ended May 31, 2013 to $7,162,027 for the nine months ended May 31, 2014. The following discusses the various changes in costs and expenses:

Compensation and benefits increased by $130,561, or 5%, primarily associated with increase in workforce due to higher net patient service revenues.

Medical services and supplies expenses increased by $219,343, or 18%, primarily due to a 20% increase in the number of cases and also due to a change in the surgical mix of cases.

Other operating expenses increased by $325,227, or 15%, primarily associated with higher net patient service revenues.

Other expense for the nine months ended May 31, 2014 and 2013 of $242,851 and $358,126, 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 $1,501,619 for the nine months ended May 31, 2013 to $1,704,122 for the nine months ended May 31, 2014, primarily due to an increase in marketing personnel. Compensation and benefits also includes $148,023 and $60,121 of non-cash compensation expense for the nine months ended May 31, 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 $1,848,106, from $2,662,919 for the nine months ended May 31, 2013 to $814,813 for the nine months ended May 31, 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 $3,115,995, from $3,651,677 for the nine months ended May 31, 2013 to $535,682 for the nine months ended May 31, 2014. Rent and other income for the nine months ended May 31, 2014 includes (a) an amount of $74,839 in foreign currency gains, (b) a gain of $161,864 in trading securities, and (b) miscellaneous other income of $298,979. 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.

Interest income of $653,320 and $678,964 for the nine months ended May 31, 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 May 31, 2014, these securities are valued at approximately $21.3 million. Unrealized gains in these investments of $13.1 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at May 31, 2014. During the nine months ended May 31, 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 $706,350, 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 May 31, 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 nine months ended May 31, 2013 was $486,686, 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 nine months ended May 31, 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 $2,679,712 during the nine months ended May 31, 2014, primarily due to (a) an increase in accounts payable and accrued liabilities of $4,210,564; (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); (b) receipt of income tax refund of $569,430; and (c) depreciation and amortization of $280,632. Partially offsetting these cash inflows were (a) a net loss before discontinued operations of $1,525,895, (b) an increase in accounts receivable of $710,724, 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 $1,002,006, primarily due to sales proceeds of $1,233,286 in trading securities, which was partially offset by purchase of equipment of $231,280.

Cash flows from financing activities

Cash flow used in financing activities for continuing activities was $138,804 for payments on capital leases and notes payable.

The Company had working capital of $2,392,624 as of May 31, 2014 and maintained a liquid position by a current ratio of approximately 1.1 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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