U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended August 31, 2015
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ____ to ____
Commission file number: 000-21574
DYNACQ HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 76-0375477 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 4301 Vista Road, Pasadena, Texas | 77504 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 378-2000
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of each class
Common Stock, $0.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check One):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of February 28, 2015 was $1,847,765. The price used to calculate this amount is based on a trade in the “Grey Market,” as there is currently no established public trading market for the registrant’s common stock. See below “Item 1A - Risk Factors” and “Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for more information regarding the Grey Market and this issue.
As of November 23, 2015, the registrant had 13,601,624 shares of common stock outstanding.
TABLE OF CONTENTS
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This annual report on Form 10-K contains forward-looking statements regarding future events and our future financial performance. Words such as "expects," "intends," "forecasts," "projects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" and similar expressions identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act. All forward-looking statements are based on our current beliefs as well as assumptions made by and information currently available to us. These statements reflect our current views with respect to future events. Important factors that could cause actual results to materially differ from our current expectations include the risks and uncertainties described in Item 1A. Risk Factors below. Please read the following discussion of the results of our business and our operations and financial condition and the risk factors along with our consolidated financial statements, including the notes, included in this annual report on Form 10-K.
| Item 1. | Business. |
General
Dynacq Healthcare, Inc., a Nevada corporation (the “Company”), is a holding company that through its subsidiaries in the United States develops and manages one general acute care hospital that principally provide specialized surgeries. The Company through its United States subsidiaries owns and operates one general acute care hospital in Pasadena, Texas. The Company through its subsidiary in Hong Kong invests in debt and equity securities, including short-term investments in initial public offerings and pre-initial public offerings.
The Company was incorporated in Nevada in February 1992. In November 2003, the Company reincorporated in Delaware and changed its name from Dynacq International, Inc. to Dynacq Healthcare, Inc. In August 2007, the Company reincorporated back in Nevada. The terms "Company," "Dynacq," "our" or "we" are used herein to refer to Dynacq Healthcare, Inc. and its affiliates unless otherwise stated or indicated by context. The term "affiliates" means direct and indirect subsidiaries of Dynacq Healthcare, Inc. and partnerships and joint ventures in which subsidiaries are general or limited partners or members.
The Company's hospital, Surgery Specialty Hospitals of America – Southeast Houston Campus in Pasadena, Texas, near Houston (the "Pasadena facility"), includes operating rooms, pre- and post-operative space, intensive care units, nursing units and diagnostic facilities, as well as adjacent medical office buildings.
Except for emergency room patients, surgeries at our facilities are typically pre-certified or pre-authorized by insurance carriers. The bulk of the surgeries are either covered by workers' compensation insurance or by commercial insurers on an out-of-network health plan basis. The Company participates in a small number of managed care contracts.
The Company, through its affiliates, owns or leases 100% of the real estate and equipment in its facility. As of August 31, 2015, the Company has a 100% ownership interest in its Pasadena facility.
Corporate Division
The Company formed Sino Bond Inc. Limited, a Hong Kong corporation (“Sino Bond”) to hold and manage investments in Hong Kong. Sino Bond invests in corporate debt instruments and equity securities in Europe and Asia, including initial public offerings and pre-initial public offerings.
Industry Background and Business Growth
U.S. Division
In the United States, the development of proprietary general acute care hospital networks occurred during the 1970's. During the past 20 years, freestanding outpatient surgery centers were developed to compete with these general hospitals for outpatient procedures. Freestanding outpatient surgery centers have allowed physicians to perform outpatient procedures in specialized facilities designed to improve efficiency and enhance patient care. The Company believes that its operational model allows physicians to perform inpatient and outpatient procedures at facilities that provide similar efficiencies as those provided at freestanding outpatient surgery centers.
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General acute care hospitals specializing in specific complex surgical procedures are designed with the goal of improving both physician and facility efficiency. The surgeries performed are primarily non-emergency procedures that are electively scheduled and, therefore, allow for efficiency available through block time/scheduling. Given the opportunity to utilize multiple operating rooms for pre-determined periods of time, the physicians are able to schedule their time more efficiently and, therefore, increase the number of procedures they can perform within a given amount of time. The facility receives the benefit of consistent staffing patterns and greater facility utilization. In addition, the Company believes that, due to the relatively small size of its facility, many physicians prefer to perform procedures in the Company's facility because their patients prefer the comfort of a more personal atmosphere and the convenience of simplified admission and discharge procedures.
At August 31, 2015 and 2014, the Company owned, through its subsidiaries, a 100% partnership interest in the Pasadena facility operating entity. The Pasadena facility's areas of practice include orthopedic and general surgery, such as spine and bariatric surgeries, various pain management modalities and other services. Through its affiliates, the Company owns 100% of the real estate and owns or leases 100% of the equipment.
In recent years, the Pasadena facility has been operating at a substantial loss. The Company continues to attempt to revitalize the operations of the Pasadena facility through a number of avenues, including the possibility of expanding its business in more profitable areas of operation. However, there can be no assurance that we will be successful in turning the facility around.
Creating and Maintaining Relationships with Quality Physicians
Since physicians provide and influence the direction of healthcare, we have developed our operating model to encourage physicians to affiliate with us and to use our facilities in accordance with their practice needs. Our strategy is to focus on the development of physician partnerships and facilities that will enhance their practices in order to provide quality healthcare in a friendly environment for the patient. We seek to attract new physicians to our facilities in order to grow or to replace physicians who retire or otherwise depart from time to time, as well as to expand the surgical case mix.
Attracting and Retaining Key Personnel
We place the utmost importance on attracting and retaining key personnel to be able to provide quality facilities to attract and retain qualified physicians. Attracting and retaining the appropriate personnel at all levels within the organization, including senior executives at the corporate level, are also important goals of management and essential in expanding our operations.
Further Refining Hospital Design
We believe we attract physicians because we design our facilities and adopt staffing, scheduling and clinical systems and protocols to increase physician productivity and promote their professional success. We focus attention on providing physicians with quality facilities designed to improve the physicians' and their patients' satisfaction.
Adding New Capabilities to Existing Hospital
Currently, some of our more complex surgeries include spine and bariatric surgeries for which we have added more surgical equipment. The Company continues to explore the possibility of adding other types of surgical procedures that fit into our business model.
Corporate Division
Sino Bond is an investment vehicle for the Company in China, Southeast Asia and Europe.
Marketing
Our marketing efforts are directed primarily at physicians and other healthcare professionals who are principally responsible for referring patients to our facilities. We market our facilities to physicians by emphasizing the high level of patient satisfaction with our hospitals, the quality and responsiveness of our services and the practice efficiencies provided by our facilities. We believe that providing quality facilities creates a positive environment for patients and physicians.
The Pasadena facility is designated as a Bariatric Center of Excellence by the American Society for Bariatric Surgery (“ASBS”). The ASBS Center of Excellence designation recognizes surgical programs and surgeons who have demonstrated a track record of favorable short and long-term outcomes in bariatric surgery and have the resources to perform safe bariatric surgeries.
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Competition
Presently, the Company operates in the greater Houston, Texas market. The Company competes with other providers, including major acute care hospitals. These entities may have various competitive advantages over the Company, including their community position, capital resources, physician partnerships and proximity to physician office buildings. The Company also encounters competition with other companies for strategic relationships with physicians.
There are several large publicly-held companies, and numerous privately-held companies, that acquire and develop freestanding private hospitals and outpatient surgery centers. Many of these competitors have greater financial and other resources than the Company. The principal competitive factors that affect the Company's ability and the ability of its competitors to acquire or develop private hospitals are experience, reputation, relationships with physicians and other medical providers, as well as access to capital. Further, some surgeon groups develop surgical facilities without a corporate partner. The Company can provide no assurance that it will be able to compete successfully in these markets.
Government Regulation
Overview
In the United States, all participants in the healthcare industry are required to comply with extensive government regulation at the federal, state and local levels. Under these laws and regulations, hospitals must meet requirements for licensure and qualify to participate in government programs, including Medicare and Medicaid. These requirements relate to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, hospital use, rate-setting, compliance with building codes and environmental protection laws, as well as patient confidentiality requirements. There are also extensive regulations governing a hospital's participation in government programs and payment for services provided to program beneficiaries. These laws and regulations are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. Some of the laws applicable to us are subject to limited or evolving interpretations; therefore, a review of our operations by a court or law enforcement or regulatory authority may result in a determination that could have a material adverse effect on us. Providers that are found to have violated any of these laws and regulations may be excluded from participating in government healthcare programs, subjected to significant fines or penalties and/or required to repay amounts received from the government for previously billed patient services. Although we believe our policies, procedures and practices comply with governmental regulations, no assurance can be given that we will not be subjected to additional governmental inquiries or actions, or that we will not be faced with sanctions, fines or penalties if so subjected. Furthermore, the laws applicable to us may be amended or interpreted in a manner that could have a material adverse effect on us.
Texas Workers' Compensation Systems
A significant amount of our net revenue results from Texas workers' compensation claims. As such, we are subject to the rules and regulations of the Texas Department of Workers’ Compensation (“TDWC”). See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Revenue Recognition – Contractual Allowance" for a description of the relevant rules and regulations of the TDWC.
Licensure, Certification and Accreditation
Our hospital is subject to state and local licensing regulations ranging from the adequacy of medical care to compliance with building codes and environmental protection laws. The failure to comply with these regulations could result in the suspension or revocation of a healthcare facility's license. To assure continued compliance with these regulations, our facility is subject to periodic inspection by governmental and other authorities. Moreover, in order to participate in the Medicare and Medicaid programs, our hospital must comply with the applicable regulations of the United States Department of Health and Human Services (“DHHS”) relating to, among other things, equipment, personnel and standards of medical care, as well as comply with all applicable state and local laws and regulations. If a hospital fails to substantially comply with the numerous conditions of participation in the Medicare and Medicaid programs or performs certain prohibited acts, the hospital's participation in the federal or state healthcare programs may be terminated, civil or criminal penalties may be imposed under certain provisions of the Social Security Act, or both.
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We believe that our hospital is in substantial compliance with current applicable federal, state and local regulations and standards. However, the requirements for licensure and certification are subject to change. Consequently, in order for our hospital to remain licensed and certified, it may be necessary from time to time for us to make material changes in our facility, equipment, personnel and/or services.
Professional Licensure
Healthcare professionals at our hospital are required to be individually and currently licensed or certified under applicable state law and may be subject to numerous Medicare and Medicaid participation and reimbursement regulations. We take steps to ensure that all independent physicians and our employees and agents have the necessary licenses and certifications with their respective licensing agency. We believe that our employees and agents as well as all independent physicians on staff comply with all applicable state licensure laws.
Corporate Practice of Medicine and Fee-splitting
Some states, such as Texas, have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians. Some states, including Texas, also have adopted laws that prohibit direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of license, civil and criminal penalties, and rescission of the business arrangements. These laws vary from state to state, are often vague and in most states have seldom been interpreted by the courts or regulatory agencies. We have structured our arrangements with healthcare providers to avoid the exercise of any responsibility on behalf of the physicians utilizing our hospitals that could be construed as affecting the practice of medicine and to comply with all such applicable state laws. However, we cannot assure you that governmental officials charged with the responsibility for enforcing these laws will not assert that we, or the transactions in which we are involved, are in violation of these laws. These laws also may be interpreted by courts in a manner inconsistent with our interpretations.
Federal Anti-kickback Statute
The Medicaid/Medicare Anti-kickback Statute prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent of generating referrals or orders for services or items covered by a federal healthcare program. Courts have interpreted this statute broadly. A violation of the Anti-kickback Statute constitutes a felony and may be punished by a criminal fine of up to $25,000 for each violation, imprisonment up to five years, or both, civil money penalties of up to $50,000 per violation and damages of up to three times the amount of the illegal kickback and/or exclusion from participation in federal healthcare programs, including Medicare and Medicaid.
The Office of Inspector General at the DHHS (the "OIG"), among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse and waste in federal healthcare programs. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. The OIG has published final safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the Anti-kickback Statute. Currently there are statutory exceptions and safe harbors for various activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personal services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, freestanding surgery centers and referral agreements for specialty services. Compliance with a safe harbor is not mandatory. The fact that a particular conduct or a business arrangement does not fall within a safe harbor does not automatically render the conduct or business arrangement illegal under the Anti-kickback Statute. Such conduct and business arrangements, however, may lead to increased scrutiny by government enforcement authorities. The determination as to compliance with the Anti-kickback statute outside of a safe harbor rests on the particular facts and circumstances and on the parties’ intent in entering into the transaction or arrangement.
We have a variety of financial relationships with physicians who refer patients to our hospital. Physicians may own interests in our hospital and may also own our stock. We also have medical directorship agreements with some physicians. Although we believe that our arrangements with physicians have been structured to comply with the current law and available interpretations, we cannot assure you that regulatory authorities will not determine that these arrangements violate the Anti-kickback Statute or other applicable laws. If our arrangements were found to violate the anti-kickback law, we could be subject to criminal and civil penalties and/or possible exclusion from participating in Medicare, Medicaid or other governmental healthcare programs such as workers' compensation programs. Exclusion from these programs could result in significant reductions in revenue and could have a material adverse effect on our business.
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Stark Law
The federal physician self-referral statute is commonly known as the Stark law. This law prohibits physicians from referring Medicare and Medicaid patients who need “designated health services” (“DHS”) to entities with which the physician or an immediate family member has a financial relationship and prohibits the entities from billing Medicare or Medicaid for services ordered pursuant to a prohibited referral. Stark does, however, have a number of exceptions that permit financial relationships between physicians and entities providing DHS. However, the exception allowing physicians to invest in a hospital has been severely limited. Sanctions for violating the Stark law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil monetary penalties of up to $15,000 per prohibited service provided and exclusion from the Medicare and Medicaid programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme that has the principal purpose of assuring referrals and that, if directly made, would violate the Stark law.
Although we monitor all aspects of our business, due to the complexity and continuously evolving nature of the law, we cannot give assurance that federal regulatory authorities will not determine that any of our arrangements with physicians violate the Stark law. Additionally, the Stark law may be amended in ways that we cannot predict at this time, including possible changes to the current physician ownership and compensation exceptions and we cannot predict whether any other law or amendment will be enacted or the effect they might have on us.
State Anti-kickback and Physician Self-Referral Laws
The state of Texas, in which we operate, has adopted anti-kickback laws, some of which apply more broadly to all payers, not just to federal healthcare programs. Many of these state laws do not have safe harbor regulations comparable to the federal Anti-kickback Statute and have only rarely been interpreted by the courts or other government agencies. Based on court and administrative interpretations of the federal Anti-kickback Statute, we believe that the Anti-kickback Statute prohibits payments only if they are intended to induce referrals. However, the laws in most states, including Texas, regarding kickbacks have been subjected to more limited judicial and regulatory interpretation than federal law. Therefore, we can give you no assurances that our activities will be found to be in compliance with these laws. Noncompliance with these laws could subject us to penalties and sanctions and could have a material adverse effect on us.
A number of states, including Texas, have enacted physician self-referral laws that are similar in purpose to the Stark law but which impose different restrictions. Some states, for example, only prohibit referrals when the physician's financial relationship with a healthcare provider is based upon an investment interest. Other state laws apply only to a limited number of designated health services. Some states do not prohibit referrals, but require that a patient be informed of the financial relationship before the referral is made. We believe that our operations are in material compliance with the physician self-referral laws of the state of Texas, in which our hospital is located, however, it is possible that different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our hospital, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated one or more of these laws could have a material adverse effect on our business, financial condition or results of operations and our business reputation.
Other Fraud and Abuse Provisions
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") broadened the scope of certain federal fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health benefit programs. HIPAA also added a prohibition against incentives intended to influence decisions by Medicare beneficiaries as to the provider from which they will receive services. In addition, HIPAA created new enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive 10% of the overpayments recovered or $1,000, whichever is less, for providing information on Medicare fraud and abuse that lead to the recovery of at least $100 of Medicare funds. HIPAA was followed by The Balanced Budget Act of 1997, which created additional fraud and abuse provisions, including civil penalties for contracting with an individual or entity that the provider knows or should know is excluded from a federal healthcare program.
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The Social Security Act also imposes criminal and civil penalties for making false claims and statements to Medicare and Medicaid programs. False claims include, but are not limited to, billing for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement, billing for unnecessary goods and services, and cost report fraud. Criminal and civil penalties may be imposed for a number of other prohibited activities, including failure to return known overpayments, certain gainsharing arrangements, and offering remuneration to influence a Medicare or Medicaid beneficiary's selection of a healthcare provider. Like the Anti-kickback Statute, these provisions are very broad. Careful and accurate coding of claims for reimbursement, as well as accurately preparing cost reports, must be performed to avoid liability.
The Federal False Claims Act and Similar State Laws
A factor affecting the healthcare industry today is the use of the FCA and, in particular, actions brought by individuals on the government's behalf under the FCA's "qui tam" or whistleblower provisions. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government.
When a defendant is determined by a court of law to be liable under the FCA, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each false claim submitted. There are many potential bases for liability under the FCA. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The FCA defines the term "knowingly" broadly. Thus, although simple negligence will not give rise to liability under the FCA, submitting a claim with reckless disregard to its truth or falsity constitutes a "knowing" submission under the FCA and, therefore, will qualify for liability. The Fraud Enforcement and Recovery Act significantly amended the FCA. Among the most significant changes, Congress clarified and corrected certain provisions of the FCA by legislatively overruling various court decisions that sought to interpret the scope of the FCA. Other significant changes to the FCA include an expansion of the definition of “claim,” increased liability for retaining overpayments from the government, and clarification of several provisions related to whistleblower actions. The amendments extend the FCA to instances of misuse of federal funds even when no false claim is presented to the government.
In some cases, whistleblowers and the federal government have taken the position that providers who allegedly have violated other statutes, such as the Anti-kickback Statute and the Stark law, have thereby submitted false claims under the FCA. The state of Texas, in which we operate, has adopted its own false claims provisions as well as its own whistleblower provisions whereby a private party may file a civil lawsuit in state court.
Health Information Security and Privacy Practices
The Administrative Simplification provisions of HIPAA require certain organizations, including us, to implement very significant business and operational systems designed to protect each patient's individual healthcare information.
Pursuant to HIPAA, we are obligated to appoint or have appointed privacy and security officers, analyze our existing patient record confidentiality system, develop systems to meet the increased confidentiality requirements in the areas of both privacy and security, draft and implement policies and procedures to maintain those systems, train all relevant personnel in the policies and procedures, monitor the systems on an on-going and continuous basis, notify every new and existing patient of our confidentiality practices and contract with certain vendors to assure they adhere to the same strict confidentiality and security standards.
The imposition of HIPAA privacy, security and transactional code set standards on healthcare providers, among others, is a substantial step by the federal government toward requiring that individual health and medical records are developed, maintained and billed for in electronic format. The rules continue to be amended and, as such, we will continue to modify our systems in order to maintain compliance with the standards.
In 2009, a law known as the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) was enacted. It was aimed at increasing the use of EHRs by physicians and hospitals. Hospitals and physicians who are “meaningful users” of EHRs may receive higher reimbursement rates through the Medicare and Medicaid reimbursement systems. Other significant changes made by HITECH Act include allowing state Attorneys General to assist in the enforcement of HIPAA and imposing the full HIPAA liabilities of Covered Entities on Business Associates as well. Additionally, the HITECH Act puts in place numerous changes to patient access to their protected health information and their privacy rights. We continue to review and monitor the HIPAA policies and procedures in place at our Pasadena facility to comply with the HITECH Act changes.
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The HITECH Act significantly increased penalties for violations of HIPAA. In the past, civil monetary penalties for HIPAA violations had been limited to $100 per violation, with a maximum of $25,000 for all violations of an identical requirement in a single year. With the HITECH Act, fines start at $100 per violation (maximum $25,000 per year) and go to $50,000 per violation ($1,500,000 per year). Also, the HITECH Act provides that HHS must develop a methodology by which victims of privacy violations may receive a share of penalties that are collected by the federal government. Finally, the HITECH Act provides that state attorneys general may bring a civil action to enjoin privacy or security violations or obtain damages on behalf of state residents for such violations. Violations of the HIPAA privacy standards can also result in tort liability claims, disciplinary proceedings, and even criminal prosecutions for deliberate disclosures that involve malicious intent or personal gain. Violations of a patient’s privacy may potentially result in tort liability claims.
In 2013, the Office of Civil Rights published the HITECH Final Rule (“Omnibus Rule”). The Omnibus Rule incorporates the HITECH Act provisions related to the right of patients to an electronic copy of their health record, the prohibition on the sale of PHI without authorization, clarification that marketing communications paid for by a third party require authorization, that patients must be given an easy way to stop fundraising communications and the right for patients to restrict disclosures to health plans of treatment or services paid for in cash. The Omnibus Rule also requires that genetic information be treated as PHI and prohibits health plans from using or disclosing genetic information for underwriting purposes. Significantly, the Omnibus Rule requires providers to update their Notice of Privacy Practices, revises the breach notification provisions and requires Business Associates to comply with all provisions of the HIPAA Security and Privacy Rules. We have updated our HIPAA Security and Privacy Rules Policies and Procedures to reflect changes made by the Omnibus Rule.
Emergency Medical Treatment and Labor Act
Our hospital is subject to the Emergency Medical Treatment and Labor Act ("EMTALA"). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital's dedicated emergency department for treatment and, if the patient is suffering from an emergency medical condition, either to stabilize that condition or to make an appropriate transfer of the patient to a facility that can stabilize the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient's ability to pay for treatment. CMS has issued final regulations and interpretive guidelines clarifying various requirements under EMTALA. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient's ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured patient, the patient's family or a medical facility that suffers a financial loss as a direct result of another hospital's violation of the law can bring a civil suit against the hospital.
Although we believe that our emergency care practices are in compliance with EMTALA requirements, we cannot assure that CMS or others will not assert that our facility is in violation or predict any modifications that CMS will implement in the future.
Utilization Review
Federal regulations require that admissions and utilization of facilities by Medicare and Medicaid patients must be reviewed in order to ensure efficient utilization of facilities and services. The law and regulations require Quality Improvement Organizations (“QIOs”) to review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of diagnosis related group classifications and the appropriateness of cases of extraordinary length of stay. QIOs may deny payment for services provided, assess fines and also have the authority to recommend to the Department of Health and Human Services that a provider that is in substantial non-compliance with the standards of the QIOs be excluded from participating in the Medicare program.
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Audits
As with most all hospitals, we are subject to numerous types of federal and state audits to validate the accuracy of claims submitted to the Medicare and Medicaid programs. If these audits identify overpayments, we could be required to make a substantial repayment of prior years’ payments subject to various administrative appeal rights. The federal and state governments contract with third-party auditors, some on a contingency fee basis. We periodically undergo claims audits by both federal and state auditors. To date there have been no material overpayments identified. However, potential liability from future federal or state audits could potentially be substantial. Further, Medicare and Medicaid regulations also provide for withholding Medicare and Medicaid overpayments in certain circumstances, which could adversely affect our cash flow.
Certificate of Need
Some states require state approval for construction and expansion of healthcare facilities, including findings of need for additional or expanded healthcare facilities or services. Certificates of need, which are issued by governmental agencies with jurisdiction over healthcare facilities, are sometimes required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. Currently, we do not operate in any state that requires a certificate of need. Should we desire to expand our operations to any jurisdiction where a certificate of need will be required, we are unable to predict whether we will be able to obtain any such certificate of need.
Environmental Regulation
Our facilities’ operations generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. These operations also are subject to compliance with various other environmental laws, rules and regulations. We cannot predict whether the cost of such compliance will have a material effect on our future capital expenditures, earnings or competitive position.
Insurance
The Company maintains various insurance policies that cover its Pasadena facility including occurrence medical malpractice coverage. In addition, all physicians granted privileges at the Pasadena facility are required to maintain medical malpractice insurance coverage. The Company also maintains general liability and property insurance coverage, including flood coverage. We do not carry director and officer liability insurance, and we indemnify our directors and officers against monetary damages, including advancing expenses, to the fullest extent permitted by Nevada law. The Company does not currently maintain worker's compensation coverage in Texas. In regard to the Employee Health Insurance Plan, until April 30, 2014, the Company was self-insured with specific and aggregate re-insurance with stop-loss levels appropriate for the Company's group size. Effective May 1, 2014, the Company has taken coverage for its employees under a fully insured health plan.
Employees
As of November 6, 2015, the Company employed approximately 96 full-time employees. In addition, the Company employed 30 part-time/flex employees, which represent approximately 6 full-time equivalent employees.
Available Information
We file proxy statements and annual, quarterly and current reports with the U.S. Securities and Exchange Commission ("SEC"). You may read and copy any document that we file at the SEC's public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may also call the SEC at 1-800-SEC-0330 for information on the operation of the public reference room. Our SEC filings are also available to you free of charge at the SEC's website at http://www.sec.gov. We also maintain a website at http://www.dynacq.com that includes links to our SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. These reports are available on our website without charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Information contained on our website should not be considered part of this report.
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The value of an investment in Dynacq Healthcare, Inc. is subject to significant risks, certain of which are specific to our Company, others are inherent in our business and the industry in which we operate, and still others are market related. If any of the matters described in the risk factors listed below were to occur, our business and financial results could be materially adversely affected. The Risk Factors described below apply to the current operations and market for the common stock of the Company, and do not address risks that may arise in the future.
Risks Related to our Business
We continue to incur substantial losses, and we have no current prospect of generating operating profits.
For the fiscal years ended August 31, 2015 and 2014, our business generated a net loss of approximately $3.8 million in each year. In recent years, our net patient revenues have declined, relative to historical levels, due to declines in patient referrals. While we continue to seek out additional sources of patient referrals, we have not been able to realize the substantial increase in patient referrals we require in order to generate the revenues needed to offset our operating losses. Our industry is highly competitive, and we have not been able to identify and execute any business plan that might result in an operating profit. We are currently evaluating strategic alternatives in an attempt to reverse our historical trend of operating losses, although there can be no assurance that we will be able to reverse this trend. If we are unable to generate positive net income on a consistent basis going forward, we may not be able to continue our operations.
Our cash reserves cannot continue to support the level of losses we have incurred in recent years.
As of August 31, 2015, we had approximately $18.8 million in net assets, including approximately $15.8 million in cash and cash equivalents, available for continuing operations. These reserves are being steadily depleted by our losses, which totaled approximately $44.1 million in our last five fiscal years. If we are unsuccessful in implementing an alternative business plan to increase revenues and improve performance, or are otherwise required to continue to use a substantial portion of our current assets in order to continue our day to day operations, then our continued operations will not be sustainable.
A significant percentage of our revenues are generated through relatively few physicians.
For the fiscal year ended August 31, 2015, approximately 84% of our gross revenues were generated from six surgeons. For the fiscal year ended August 31, 2014, approximately 84% of our gross revenues were generated from five surgeons. The loss of physicians who provide significant net patient revenues for the Company may adversely affect our results of operations.
We are subject to substantial uninsured liabilities for which we have incurred, and may continue to incur, significant expenses.
Although we maintain professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe to be appropriate for our operations, our insurance coverage may not be sufficient or continue to be available at a cost allowing us to maintain adequate levels of insurance. Our professional malpractice liability insurance has covered the majority of malpractice and related legal claims to date; however, the cost of defending shareholder derivative suits and/or shareholder oppression claims and any damages awarded as a result of these claims, are paid by the Company. In addition, the large monetary claims and significant defense costs involved in many of the malpractice claims may exceed the limits of our insurance coverage. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, we could be adversely affected. We do not employ any of the physicians who conduct procedures at our hospitals, and the governing documents of each of our hospitals require physicians who conduct procedures at our hospitals to maintain stated amounts of insurance.
We indemnify our directors and officers against certain liabilities and do not presently carry director and officer liability insurance.
As permitted under Nevada law and pursuant to our governing documents and indemnification agreements with certain of our officers and directors, we indemnify our directors and officers against monetary damages, including advancing expenses, to the fullest extent permitted by Nevada law. We do not carry director and officer liability insurance, so our assets are at risk in the event of successful claims against us or our officers and directors. Our assets may not be sufficient to satisfy judgments against us and our officers and directors in the event of such successful claims. In addition, our lack of director and officer liability insurance may adversely affect our ability to attract and retain highly qualified directors and officers in the future.
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We are dependent on the services of our Chief Executive Officer.
The Company's future success will depend upon its ability to retain the services of its Chief Executive Officer. The Company does not have a written employment agreement with our Chief Executive Officer providing for specific terms of employment, and does not carry any key man life insurance. The Company's loss of its Chief Executive Officer, especially if the loss is without advance notice, could have a material adverse effect on the Company's business, financial condition or results of operations.
We hold accounts with certain financial institutions that exceed the FDIC and SIPC insurance limits in the U.S. and Hong Kong Deposit Protection Board insurance limits in Hong Kong.
The Company has financial instruments that are exposed to concentrations of credit risk and consist primarily of cash investments and trade accounts receivable. The Company routinely maintains cash and temporary cash investments at certain financial institutions in amounts substantially in excess of (a) Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation ("SIPC") insurance limits in the U.S. and (b) Hong Kong Deposit Protection Board (“HKDPB”) insurance limits in Hong Kong. At August 31, 2015, the Company had cash balances in excess of the FDIC and SIPC limits in the U.S. and HKDPB limits in Hong Kong of $13.9 million. Management believes that these financial institutions are of high quality and the risk of loss is minimal. However, if any of these financial institutions were to fail and we were unable to recover our cash balances, it could have a material adverse effect on the Company's business, financial condition or results of operations.
Our business could be adversely affected by foreign currency fluctuation.
Because we have total assets of approximately $9.6 million which are denominated in currency other than the U.S. dollar (USD), we have foreign currency exchange risk. The U.S. dollar (USD) has experienced volatility in world markets recently. During fiscal 2015 and 2014, fluctuation in the Euro – Hong Kong dollar exchange rate resulted in exchange losses of $400,162 and $21,319, respectively, which are included in rent and other income in our consolidated statements of operations.
Our investments in marketable securities in foreign markets are subject to a high degree of risk and differences in market conditions than those in the U.S.
We have significant unrealized gains on our investments in available-for-sale securities. Approximately 30% of our assets as of August 31, 2015 are represented by foreign investment securities, which are generally less liquid, more volatile and harder to value than U.S. securities. These foreign investments are subject to unique risks such as currency risk, political, social and economic risk, and foreign market and trading risk. Foreign investments may be affected by political, social or economic events occurring in a country where the bonds are invested, which could cause the investments in that country to experience gains or losses. Lack of public information and uniform auditing, accounting and financial reporting standards in foreign countries make disclosure of investment information different from that available from domestic issuers. The trading markets for these investments are significantly less active than U.S. markets and may have less governmental regulation and oversight. Because of these risks, and others, there can be no assurance that the Company’s investments in securities in foreign markets will retain or increase in value or can be liquidated at a price or time favorable to the Company.
Risks Associated with our Industry
The Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, (collectively, the “ACA”) may have a significant impact on our existing and future operations.
The ACA, as well as other health reform legislation and regulation, may have a significant impact on our existing and future operations in that it will extend insurance coverage through Medicaid or private insurance to a broader segment of the U.S. population. Many provision of the ACA became effective on January 1, 2014. The continued development of Accountable Care Organizations may limit our ability to provide services to Medicare beneficiaries and other changes to the law implemented as part of health care reform could further restrict the care we are able to offer patients. The current economic climate as well as efforts to reduce healthcare costs could reduce the reimbursement we receive for the services we do provide and may adversely affect our business and results of operations.
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One key provision of the ACA is the individual mandate, which requires most Americans to maintain “minimum essential” health insurance coverage. For individuals who are not exempt from the individual mandate, and who do not receive health insurance through an employer or government program, the means of satisfying the requirement is to purchase insurance from a private company or an insurance exchange. Beginning in 2014, individuals who are enrolled in a health benefits plan purchased through an exchange may be eligible for a premium credit or cost-sharing subsidy. Federal court cases are still pending on whether the government can subsidize health insurance premiums under the ACA.
The “employer mandate” provision of the ACA requires the imposition of penalties on employers having 50 or more employees who do not offer affordable health insurance coverage to those employees working 30 or more hours per week. In 2013, the imposition of these penalties was delayed until January 1, 2015. In 2014, the employer mandate was further delayed until January 1, 2016. Based on estimates from the Congressional Budget Office, we do not believe that the delays in implementation of the employer mandate will have a measureable effect on the number of people insured.
Although we are unable to predict the precise impact of the individual and employer mandates on our future operations, and while there have been and will continue to be some reductions in reimbursement rates by government payers, we anticipate, based on the current timetable for implementing the law, that we may begin to have a positive impact from the increased number of insured patients.
Another key provision of the ACA is the expansion of Medicaid coverage. The expansion of the Medicaid program (substantially all of which will be funded initially by the federal government) requires each state legislature to take action. To date, Texas has chosen not to expand its Medicaid program through this mechanism. However, Texas has expanded its Medicaid program through the 1115 Medicaid Waiver program. The Texas Health and Human Services Commission has received federal approval of a waiver that allows the state to expand Medicaid managed care while preserving hospital funding, provides incentive payments for health care improvements and directs more funding to hospitals that serve large numbers of uninsured patients. While we are unable to predict the precise impact of 1115 Medicaid Waiver program on our future operations, it may be that we are able to receive reimbursement for caring for uninsured and underinsured patients through this program.
If we fail to comply with the extensive laws and complex government regulations applicable to us, we could suffer penalties or be required to make significant changes to our operations.
The U.S. healthcare industry is highly regulated and must comply with extensive government regulation at the federal, state and local levels. Hospitals must meet requirements for licensure and certification to participate in government programs and accreditation. In addition, there are regulatory requirements related to areas such as adequacy and quality of medical care, relationships with physicians and other referral sources (Anti-kickback Statute and Stark law, for example), qualifications of medical and support personnel, billing for services, confidentiality of medical records, emergency care and compliance with building codes. While we believe that we are in substantial compliance with these extensive government laws and regulations, if we fail to comply with any of the laws or regulations we could be subject to criminal penalties and civil sanctions, and our facilities could lose their licenses and their ability to participate in federal and state healthcare programs. In addition, government laws and regulations, or the interpretation of such laws and regulations, may change. In that case, we may have to make changes in our facility, equipment, personnel, services or business structures so that our facility may remain licensed and qualified to participate in federal and state programs. If the rules governing reimbursement are revised or interpreted in a different manner or if a determination is made that we did not comply with these requirements, we could be subject to denials of payment or recoupment of payments already received for services provided to patients.
Specifically, the federal Anti-kickback Statute and the Stark law are very broad in scope, and many of their provisions have not been uniformly or definitively interpreted. See Business – Government Regulation for an in- depth description of those statutes. If the ownership distributions paid to physicians by our hospital is found to constitute prohibited payments made to physicians under the Anti-kickback Statute, physician self-referral or other fraud and abuse laws, our business may be adversely affected. Other companies within the healthcare industry continue to be the subject of federal and state investigations that could increase the risk that we may become subject to similar investigations in the future.
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If laws governing the corporate practice of medicine change, we may be required to restructure some of our relationships.
The laws of various states in which we operate or may operate in the future do not or may not permit business corporations to practice medicine, exercise control over physicians who practice medicine or engage in various business practices, such as fee-splitting with physicians. The interpretation and enforcement of these laws vary significantly from state to state. A government agency charged with enforcement of these laws, or a private party, might assert that our arrangements with physicians and physician group practices do not comply with applicable corporate practice of medicine laws. If our arrangements with these physicians and physician group practices were deemed to violate state corporate practice of medicine, fee-splitting or similar laws, or if new laws were enacted rendering these arrangements illegal, we may be required to restructure our relationships with physicians and physician groups, which may have a material adverse effect on our business.
Changes to the Fee Guidelines for Texas workers’ compensation cases have resulted in lower reimbursement and may result in a decrease in the number of those type of procedures performed.
The Texas Workers’ Compensation 2008 Acute Care Hospital Outpatient and Inpatient Facility Fee Guidelines which became effective March 1, 2008 establish reimbursement amounts for workers’ compensation procedures performed at our facilities. Those amounts are determined by applying the most recently adopted and effective Medicare reimbursement formula and factors as published annually in the Federal Register, including identifying the appropriate Ambulatory Payment Classification for outpatient services provided, or Diagnosis Related Group for inpatient services provided. The applicable classification or group is used to determine the maximum allowable reimbursement for the procedures performed unless not calculable using Guidelines, in which case reimbursement will be determined on a fair and reasonable basis. Based on these new Guidelines, the reimbursement due the Company for workers’ compensation cases is lower than we previously experienced. Our net patient service revenues attributable to Texas workers’ compensation cases as a percentage of gross billings have decreased and may continue to decrease as a result of lower reimbursement rates for workers’ compensation procedures still being performed.
Our revenues may be negatively affected by a reduction in payments from third-party payers, a shift in the surgical mix, government cost controls and/or other circumstances over which we have no control.
We are dependent upon private and governmental third-party sources of payment for the services provided to patients in our hospital. The amount of payment our hospital receives for its services may be adversely affected by market and cost factors as well as other factors over which we have no control, including federal and state regulations and the cost containment and utilization decisions of third-party payers. The Company’s decision to participate in certain managed care contracts may not result in an increase in patient revenues if we are unable to obtain favorable managed care contracts, we are excluded from participation in a managed care contract, or the reimbursement rate for the procedure performed is too low.
Further, complicated reimbursement rules that are subject to interpretation may subject us to denials of payment for services provided or to recoupments of payments already received. We have no control over the number of patients that are referred to our hospital annually or whether such patients will be admitted as inpatients, which typically have a higher reimbursement rate per procedure, or outpatients. Fixed fee schedules, capitation payment arrangements, exclusion from participation in managed care programs or other factors affecting payments for healthcare services over which we do not have control could also cause a reduction in our revenues.
We are dependent upon the good reputation of our physicians.
The success of our business is dependent upon quality medical services being rendered by our physicians. Any negative publicity, whether from civil litigation, allegations of criminal misconduct, or forfeiture of medical licenses, with respect to any of our physicians and/or our facilities could adversely affect our results of operations. This could occur through the loss of a physician who provides significant revenue to the Company, or decisions by patients to use different physicians or facilities with respect to their healthcare needs. Several years ago Dynacq was the subject of negative publicity in news reports focusing on its Pasadena facility, which harmed its business and reputation. As the patient-physician relationship involves inherent trust and confidence, any negative publicity adversely affecting the reputation of our physicians or our facilities would likely adversely affect our results of operations.
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Our hospital faces competition for patients from other hospitals and healthcare providers.
The healthcare business is highly competitive, and competition among hospitals and other healthcare providers for patients has intensified in recent years. Generally, other hospitals in the local communities served by most U.S. hospitals provide services similar to those offered by our hospital. In addition, the number of freestanding specialty hospitals and surgery and diagnostic centers in the geographic area in which we operate has increased significantly. As a result, our hospital operates in an increasingly competitive environment. Some of the hospitals that compete with our hospital are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. Increasingly, we are facing competition by physician-owned freestanding surgery centers that compete for market share in high margin services and for quality physicians and personnel. If our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their healthcare facilities, we may experience a decline in patient volume.
Our hospital faces competition for staffing, which may increase our labor costs and reduce profitability.
Our operations are dependent on the effort, abilities and experience of the management and medical support personnel, such as nurses, pharmacists and lab technicians, as well as our physicians. We compete with other healthcare providers in recruiting and retaining qualified management and medical support personnel responsible for the day-to-day operations of our hospital. In the U.S. market, the availability of nurses and other medical support personnel has become a significant operating issue to healthcare providers. This shortage may require us to continue to enhance wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. If our labor costs increase, we may not be able to raise rates to offset these increased costs. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs could have a material adverse effect on our results of operations.
Market Risks Related to Our Stock
A stockholder controls a majority of our outstanding shares.
Mrs. Ella Chan, wife of our former Chairman and Chief Executive Officer, Mr. Chiu Chan, individually and as the sole trustee of Chiu M. Chan Family Trust, beneficially owns an aggregate of approximately 61.7% of our outstanding common stock. As the majority stockholder, she is able to control all matters requiring stockholder approval, including the election and removal of any directors and any merger, consolidation or sale of all or substantially all of our assets. Further, our governing documents provide that two-thirds constitutes a super-majority of our common stock. A super-majority has the ability to, among other things, remove members of our Board of Directors for cause or for no cause at all. Mrs. Chan together with her son, Eric K. Chan, our Chief Executive Officer, beneficially own 63.7% of our outstanding common stock. Accordingly, they would only need a small number of additional votes to achieve a super-majority. This concentration of ownership could have the effect of delaying, deferring or preventing a change of control, or impeding a merger or consolidation, takeover or other business combination or sale of all or substantially all of our assets. The interests of Ella Chan and/or Eric Chan may conflict with those of other stockholders. In the event that either elects to sell significant amounts of common stock in the future, such sales could depress the market price of our common stock, further increasing the volatility of our trading market.
We have no independent directors, and no separate board committees.
Since October 30, 2012, our Chief Executive Officer, Eric Chan, is the sole member of our Board of Directors. As a result, we no longer have any independent directors to evaluate our decisions, nor do we have any committees of our Board comprised of independent directors, including audit, nominating and compensation committees. Although we are not required by rules or regulations applicable to us to have independent directors or such committees, corporate governance measures such as the presence of independent directors and the establishment of committees comprised of independent directors may be beneficial to our stockholders. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by members of the Board who have a direct interest in the outcome. Although we anticipate seeking new independent directors in the future, there can be no assurance as to whether or when we will be successful in appointing any new directors. Moreover, while the inclusion of independent directors to our Board and the adoption of certain other corporate governance measures could benefit our stockholders, there can be no assurance that these measures would be effective even if independent directors are appointed to our Board and these governance measures are implemented.
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NASDAQ delisted our common stock effective October 22, 2012, and prior to that had placed a trading halt since August 9, 2012, which is likely to affect your ability to sell shares of our common stock and the price you may receive for our common stock.
NASDAQ delisted the common stock of our Company effective October 22, 2012. Prior to that, trading in the Company’s stock was halted by NASDAQ since August 9, 2012. The Company’s common stock is eligible to trade in the “Grey Market.” Grey Market securities do not have bid or ask quotations in the OTC Link system or the OTCBB. Broker-dealers must report Grey Market trades to FINRA, so trade data is available on http://www.otcmarkets.com and other public sources. Generally, trading in the Grey Market is much more limited than trading on NASDAQ. As such, our common stock being delisted from NASDAQ has severely decreased the liquidity of the shares of common stock that you own.
Historically, there was only limited trading activity in our securities, and we have had a relatively small public float compared to the number of our shares outstanding. Additionally, as a result of the delisting of our common stock from NASDAQ, the ability of stockholders to trade any shares has been severely impeded. Accordingly, we cannot predict the extent to which investors' interest in our common stock will provide an active and liquid trading market. Due to our limited public float, we may be vulnerable to investors taking a "short position" in our common stock, which would likely have a depressing effect on the price of our common stock and add increased volatility to our trading market. Furthermore, we have been, and in the future may be subject to, class action lawsuits that further increase market volatility. The volatility of the market for our common stock could have a materially adverse effect on our business, results of operations and financial condition. Accordingly, investors must be able to bear the financial risk of losing their entire investment in our common stock.
Future issuance of additional shares of our stock could cause dilution of ownership interests and adversely affect our stock price.
In addition to approximately 86.5 million additional shares of common stock that we are authorized to issue, our Board of Directors may issue up to five million shares of preferred stock which may have greater rights than our common stock, without seeking approval from holders of our common stock. In addition, we are obligated to issue an aggregate of approximately 772,000 shares of common stock upon the exercise of options outstanding under our 2000 and 2011 Incentive Plan. None of these options have an exercise price which is lower than the market price. The shares that could be issued upon exercise of the outstanding options represent approximately 6% of our currently outstanding shares of common stock. Additional shares are subject to options not yet granted under the Year 2011 Stock Incentive Plan, and we may grant additional options or warrants in the future to purchase shares of our common stock not under the plan. The exercise price of each option granted under our option plan is equal to the fair market value of the shares on the date of grant, although that price may be substantially less than the value per share on the date of exercise.
We have not paid cash dividends on our common stock and do not expect to do so in the foreseeable future.
It has been our policy to use all available funds from operations to improve and expand our current facilities and to acquire new facilities. For that reason, we have never paid cash dividends on our common stock and have no present intention to pay dividends in the foreseeable future. Therefore an investor in our common stock should not expect to obtain any economic benefit from owning our common stock prior to a sale of those shares, if then.
Item 1B. Unresolved Staff Comments.
None.
| Item 2. | Properties. |
The Pasadena facility, the office building adjacent to such facility and the land upon which the facility is located, are owned by a wholly-owned subsidiary of the Company, and are held free and clear of any encumbrances. The hospital is approximately 45,000 square feet, and the office building is approximately 36,000 square feet.
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| Item 3. | Legal Proceedings. |
Ping S. Chu, James G. Gerace (both former members of our Board of Directors), and Eric G. Carter (former legal counsel) along with eleven other claimants instigated a series of lawsuits making claims against Ella Y.T.C. Chan (in her individual capacity and in her capacity as Independent Executrix of the Estate of Chiu M. Chan, Deceased, our former Chief Executive Officer and director), Eric K. Chan (our current Chief Executive Officer and director), and Dynacq Healthcare, Inc. All claims were settled in mediations and as part of the settlements Dynacq repurchased 530,616 shares of Dynacq common stock in August 2014, and 286,386 shares of Dynacq stock in April 2015. These buybacks represent all stock held by each of the claimants. Additionally, as part of this settlement, Dynacq settled claims made by Eric G. Carter for payment of attorney fees, and claims by a company controlled by Mr. Carter, for breach of contract. The Company recognized $2,047,652 of expense associated with these settlements during the fiscal year ended August 31, 2014. This amount is reported as other operating expenses in the consolidated statements of operations. A portion of the settlements were attributed to the repurchase of the Company’s common stock.
The Company is routinely involved in litigation and administrative proceedings that are incidental to its business. Specifically, all judicial review of unsatisfactory determinations of reimbursement amounts due us for our Texas facilities’ fees must be made in the district courts of Travis County, Texas in what can often be a lengthy procedure. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations – Revenue Recognition for a detailed description of the medical dispute resolution (“MDR”) process and our accounts receivable. The Company cannot predict whether any future litigation or administrative proceeding to which it may become a party will have a material adverse effect on the Company's results of operations, cash flows or financial condition.
| Item 4. | Mine Safety Disclosures. |
None.
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The Company's common stock traded on the NASDAQ Global Market under the symbol “DYII” until August 8, 2012. NASDAQ delisted the common stock of our Company effective October 22, 2012. Prior to that, trading in the Company’s stock was halted by NASDAQ since August 9, 2012. Currently, there is no established public trading market for the Company’s common stock. The Company’s common stock, however, is eligible to trade in the “Grey Market.” Grey Market securities do not have bid or ask quotations in the OTC Link system or the OTCBB. Broker-dealers must report Grey Market trades to FINRA, so trade data is available on http://www.otcmarkets.com and other public sources.
As of November 23, 2015, there were approximately 374 record owners of the Company's common stock. This number does not include stockholders who hold the Company's securities in nominee accounts with broker-dealer firms or depository institutions.
The Company has not declared any cash dividends on its common stock for the two most recent fiscal years. The Company intends to retain all earnings, if any, for operations and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon the Company's results of operations, financial condition and capital requirements, as well as such other factors as the Company's Board of Directors may consider.
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Securities Authorized For Issuance under Equity Compensation Plans
The following table provides information as of August 31, 2015, with respect to the Company’s equity compensation plans under which equity securities are authorized for issuance.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance (excluding securities reflected in first column) | |||||||||
| Plans approved by shareholders | 771,654 | $ | 1.61 | 14,750,000 | ||||||||
| Plans not approved by shareholders | — | — | — | |||||||||
| Total | 771,654 | $ | 1.61 | 14,750,000 | ||||||||
| Item 6. | Selected Financial Data. |
Not required.
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Our Management’s Discussion and Analysis includes forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in Item 1A – Risk Factors.
Critical Accounting Policies and Estimates
The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to the management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities. Management believes these accounting policies involve judgment due to the significant assumptions and estimates necessary in determining the related asset and liability amounts. Management believes it has exercised proper judgment in determining these estimates based on the facts and circumstances available to it at the time the estimates were made. The significant accounting policies are described in the Company's financial statements (see Note 1 in Notes to the Consolidated Financial Statements). Of these policies, management believes the following ones may involve a comparatively higher degree of judgment and complexity. We have discussed the development and selection of the critical accounting policies and related disclosures with the Board of Directors.
Revenue Recognition
Background
The Company's revenue recognition policy is significant because net patient service revenue is a primary component of its results of operations. Revenue is recognized as services are delivered. The determination of the amount of revenue to be recognized in connection with the Company's services is subject to significant judgments and estimates, which are discussed below.
Revenue Recognition Policy
The Company has established billing rates for its medical services which it bills as services are delivered. Gross billings are then reduced by the Company’s estimate of allowances, which includes the contractual allowance and the provision for doubtful accounts, to arrive at net patient service revenues. Net patient service revenues may not represent amounts ultimately collected. The Company adjusts current period revenue for differences in estimated revenue recorded in prior periods and actual cash collections. Overall, our revenue is driven by the number and surgical mix of cases, as well as, the timing and amount collected for older accounts receivable that are fully reserved for.
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The following table shows gross revenues and allowances for fiscal years 2015 and 2014:
| 2015 | 2014 | |||||||
| Gross billed charges | $ | 31,418,070 | $ | 30,459,347 | ||||
| Allowances | 24,420,186 | 20,241,038 | ||||||
| Net revenue | $ | 6,997,884 | $ | 10,218,309 | ||||
| Allowance percentage | 78 | % | 66 | % | ||||
The table below sets forth the percentage of our gross patient service revenue by financial class for the fiscal years 2015 and 2014:
| 2015 | 2014 | |||||||
| Workers' Compensation | 30 | % | 19 | % | ||||
| Commercial | 38 | % | 42 | % | ||||
| Medicare | 21 | % | 23 | % | ||||
| Medicaid | 1 | % | 1 | % | ||||
| Self-Pay | 7 | % | 13 | % | ||||
| Other | 3 | % | 2 | % | ||||
Contractual Allowance
The Company computes its contractual allowance based on the estimated collections on its gross billed charges. The Company computes its estimate by taking into account collections received, up to 30 days after the end of the period, for the services performed and also estimating amounts collectible for the services performed within the last six months. A significant amount of our net revenue results from Texas workers' compensation claims, which are governed by the rules and regulations of the Texas Department of Workers’ Compensation (“TDWC”) and the workers’ compensation healthcare networks. If our hospital chooses to participate in a network, the amount of revenue that will be generated from workers’ compensation claims will be governed by the network contract.
For claims arising prior to the implementation of workers’ compensation networks and out of network claims, inpatient and outpatient surgical services are either reimbursed pursuant to the Acute Care In-Patient Hospital Fee Guideline or at a "fair and reasonable" rate for services in which the fee guideline is not applicable. Starting March 1, 2008, the Texas Workers’ Compensation 2008 Acute Care Hospital Outpatient and Inpatient Facility Fee Guidelines (the “Guidelines”) became effective. Under these Guidelines, the reimbursement amounts are determined by applying the most recently adopted and effective Medicare reimbursement formula and factors; however, if the maximum allowable reimbursement for the procedure performed cannot be calculated using these Guidelines, then reimbursement is determined on a fair and reasonable basis.
Should we disagree with the amount of reimbursement provided by a third-party payer, we are required to pursue the medical dispute resolution (“MDR”) process at the TDWC to request proper reimbursement for services. From January 2007 to November 2008, the Company had been successful in its pursuit of collections regarding the stop-loss cases pending before the State Office of Administrative Hearings (“SOAH”), receiving positive rulings in over 90% of its claims presented for administrative determination. A 2007 district court decision upholding our interpretation of the statute as applied to the stop-loss claims was appealed by certain insurance carriers, and on November 13, 2008 the Third Court of Appeals determined that in order for a hospital to be reimbursed at 75% of its usual and customary audited charges for an inpatient admission, the hospital must not only bill at least $40,000, but also show that the admission involved unusually costly and unusually extensive services. Procedurally, the decision means that each case where a carrier raised an issue regarding whether the services provided were unusually costly or unusually extensive would be remanded to either SOAH or MDR for a case-by-case determination of whether the services provided meet these standards. As a result of the Third Court of Appeals opinion, any stop-loss cases pending at SOAH have been remanded to the TDWC since these cases have not been reviewed or decided by the two-prong standard decided by the Third Court of Appeals. The SOAH Administrative Law judges determined that the most appropriate location for these cases is the TDWC.
A petition asking the Texas Supreme Court to review the Third Court of Appeals decision was denied. Therefore, the Company is bound by the Third Court of Appeals decision. The Texas Supreme Court’s decision delayed final adjudication in these pending stop-loss cases. The uncertain outcome in these cases will depend on a very lengthy process. We anticipate further, lengthy litigation at the Travis County District Courts and the Texas Courts of Appeals. Because of this lengthy process and the uncertainty of recovery in these cases, collection of a material amount of funds in these pending stop-loss cases cannot be anticipated.
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Through August 2015, 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 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, and in January 2014, the Company received the deposits and accrued interest totaling $4.2 million. 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 were appealed to the Court of Appeals and the funds ordered refunded were deposited with the district clerk. As with the other 47 cases, the Court of Appeals reversed the district court’s final judgments in these three cases and the Company filed motions with the district court asking that the district clerk be ordered to release the deposited funds to the Company, and in February 2014, the Company received the deposits and accrued interest totaling approximately $300,000. The total refund received by the Company in fiscal year 2014 for the 50 stop-loss cases discussed above was $4,476,097.
During the time that the carriers’ petitions seeking refunds were pending, because of the uncertainty of the results at that time, as of August 31, 2015, the Company has accrued the total potential refund amount of $11.3 million, and an additional amount of $3.9 million in interest payable, as accrued liabilities. This includes the deposit amounts refunded back to the Company in January and February 2014. We do not anticipate that any other carriers will pursue refund demands through district court but instead will pursue them administratively through TDWC, if at all. 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. The carriers contend that the voluntary payments made pursuant to the Decisions and Orders were premature payments by the carriers and may be ordered to be refunded. The Company disagrees with this contention. 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. In March 2014, a settlement conference with one self-insured entity successfully resolved the stop-loss cases in which that entity was involved. A few carriers engaged in settlement negotiations which resulted in settlements and a few negotiations are on-going. Although the Company is willing to participate in settlement negotiations, we anticipate that few, if any, other carriers are interested in doing so at this time. The Company dismissed 156 cases from the stop-loss docket based on its determination that these cases did not satisfy the “unusually cost” and “unusually extensive” standard. It is anticipated that hearings at SOAH on approximately 460 of the pending stop-loss cases still on the docket will begin in December 2015.
18
Due to the uncertainties associated with these stop-loss fee dispute cases, the Company recognized increases in the contractual allowance at our Pasadena facility of $10,254,990 during fiscal year 2011 and $149,875 during the fiscal quarter ended August 31, 2013, (and an additional contractual allowance amount of $779,583 during fiscal year 2011 and $136,542 during the fiscal quarter ended August 31, 2013, at our Garland facility, which was classified as discontinued operations). The Company has also recognized interest expense related to these refunds starting from fiscal year 2011.
Some claims regarding payment for ambulatory surgical center and hospital outpatient services remain pending at the TDWC and/or SOAH. It is expected that these remaining claims will be adjudicated at SOAH and possibly in the Texas district and appellate courts. The basis for reimbursement for these services made the subject of these pending cases is the same as it was for the other ASC and outpatient cases that have been either tried or settled: the determination of “fair and reasonable” charges. In 2007, the Company received unfavorable rulings from SOAH in all of its appeals of unfavorable decisions related to services provided in 2001 and 2002. The 179 cases, which were appealed to the Travis County district courts, challenged the constitutionality of the relevant statutory language. The Company received an unfavorable ruling in its lead case in March 2009, which ruling was appealed to and was upheld by the Third Court of Appeals on August 26, 2010. The Texas Supreme Court denied a petition asking for review of the Third Court of Appeals decision. The unfavorable interpretation by the Texas Courts of Appeal in the Company’s lead case negatively affects the recovery of additional reimbursement, not only in the lead case, but in the remaining 178 pending cases. Consequently, the Company is bound by the Third Court of Appeals’ ruling that interprets the applicable statute and fee guideline to require that the amount that will be paid to a provider must not only be at a “fair and reasonable rate” but also must “ensure the quality of medical care” and “achieve effective cost control” and be the same or less than that charged to others with an equivalent standard of living. This ruling has impacted cases in which a fee guideline was not applicable, specifically all pending cases involving ambulatory surgical services provided from 2001 through 2004 as well as all pending cases involving hospital outpatient services provided prior to March 1, 2008, when the Guidelines took effect. Since the Third Court of Appeals’ unfavorable ruling, collection, if any, in these cases depends on the Company’s ability to establish the criteria in this ruling. The Company was given the opportunity to establish the criteria in approximately 80 cases, which were set for hearing on the merits from March through May 2012 and was unsuccessful. In 2014, hearings were held in 23 of the Company’s hospital outpatient cases at SOAH. Decisions and Orders were handed down by SOAH adopting the methodology for determining “fair and reasonable” reimbursement that was put forth by the Company and ordered additional reimbursement in each of the 23 cases plus interest be paid to the Company. The carrier has appealed these decisions to Travis County district court and the cases have been consolidated. In April 2015, a large group of outpatient cases with various carriers were tried at SOAH. On November 6, 2015, a Decision and Order was handed down which applied to the 516 cases that were tried in April 2015. The Decision and Order held that under the “fair and reasonable” reimbursement standard, the Company was entitled to additional compensation in each of the 516 cases and specified the additional amounts to be paid by each carrier. It is unknown at this time whether the Decision and Order will be appealed.
Due to the uncertainties regarding the accounts receivable in the MDR process, the 2008 and 2010 Third Court of Appeals’ opinions and our legal counsel’s advice that settlements with insurance carriers in stop-loss cases had virtually stopped, the Company had fully reserved all accounts receivable related to the MDR process as of August 31, 2008. The Company has had and continues to have settlement negotiations with insurance carriers for stop-loss, ambulatory surgical center and hospital outpatient cases. Some of these negotiations have been successful. Any monies collected for these MDR accounts receivable is recorded as current period’s net patient service revenues.
Provision for Doubtful Accounts
Although outcomes vary, our policy is to attempt to collect amounts due from patients, including co-payments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations. In non-emergency circumstances or for elective procedures and services, it is our policy to verify insurance prior to a patient being treated; however, there are various exceptions that can occur.
The Company computes its allowances based on the estimated collections on its gross billed charges. The Company computes its estimate of allowance, which is a combination of contractual allowance and provision for doubtful accounts, by taking into account collections received, up to 30 days after the end of the period, for the services performed and also estimating amounts collectible for the services performed within the last six months.
19
Accounts receivable represent net receivables for services provided by the Company. At each balance sheet date management reviews the accounts receivable for collectability and provides full allowance reserves for any accounts receivable deemed uncollectible.
The allowances stated as a percentage of gross receivables at the balance sheet dates is larger than the allowance percentage used to reduce gross billed charges due to the application of partial cash collections to the outstanding gross receivable balances, without any adjustment being made to the allowances. The allowance amounts netted against gross receivables are not adjusted until such time as the final collections on an individual receivable are recognized.
The focal point of our business is providing patient care services, including complex orthopedic and bariatric procedures. The Company pursues optimal reimbursement from third-party payers for these services. In some instances, we do not have contractual arrangements with third-party payers which provide for “prompt payment” which may result in additional time to collect the expected reimbursement.
The collection process may also be extended due to our efforts to obtain all optimal reimbursement available to the Company. Specifically, for medical services provided to injured workers, the Company may initially receive reimbursement that may not be within the fee guidelines or regulatory guidelines mandating reimbursement. The Company reviews and pursues those particular claims that are determined to warrant additional reimbursement pursuant to the fee or regulatory guidelines. The Company's pursuit of additional reimbursement amounts that it believes are due under fee or regulatory guidelines may be accomplished through established dispute resolution procedures with applicable regulatory authorities.
Income Taxes
We provide for income taxes by taking into account the differences between the financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis amounts. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. This calculation requires us to make certain estimates about our future operations and many of these estimates of future operations may be imprecise. Changes in state, federal, and foreign tax laws, as well as changes in our financial condition, could affect these estimates. In addition, we consider many factors when evaluating and estimating income tax uncertainties. These factors include an evaluation of the technical merits of the tax position as well as the amounts and probabilities of the outcomes that could be realized upon ultimate settlement. The actual resolution of those uncertainties will inevitably differ from those estimates, and such differences may be material to the financial statements. Our estimates and judgments associated with our calculations of income taxes have been reasonable in the past, however, the possibility for changes in the tax laws, as well as the current economic uncertainty, could affect the accuracy of our income tax estimates in future periods.
Stock-Based Compensation
We estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense attributed is based on an estimated forfeiture rate, which is updated as appropriate. This option pricing model requires the input of highly subjective assumptions, including the expected volatility of our common stock, pre-vesting forfeiture rate and an option’s expected life. The financial statements include amounts that are based on our best estimates and judgments.
20
Results of Operations
| Year Ended August 31, 2015 | Year Ended August 31, 2014 | |||||||||||||||||||||||
| U.S. Division | Corporate | Total | U.S. Division | Corporate | Total | |||||||||||||||||||
| Net patient service revenue | $ | 6,997,884 | $ | — | $ | 6,997,884 | $ | 10,218,309 | $ | — | $ | 10,218,309 | ||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Compensation and benefits | 4,279,911 | 2,128,321 | 6,408,232 | 4,063,510 | 2,242,388 | 6,305,898 | ||||||||||||||||||
| Medical services and supplies | 1,607,788 | — | 1,607,788 | 2,106,854 | — | 2,106,854 | ||||||||||||||||||
| Other operating expenses | 3,770,995 | 1,377,823 | 5,148,818 | 3,443,781 | 3,185,139 | 6,628,920 | ||||||||||||||||||
| Depreciation and amortization | 344,445 | 2,753 | 347,198 | 363,049 | 3,834 | 366,883 | ||||||||||||||||||
| Total costs and expenses | 10,003,139 | 3,508,897 | 13,512,036 | 9,977,194 | 5,431,361 | 15,408,555 | ||||||||||||||||||
| Operating income (loss) | (3,005,255 | ) | (3,508,897 | ) | (6,514,152 | ) | 241,115 | (5,431,361 | ) | (5,190,246 | ) | |||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Rent and other income | 15,030 | 2,409,212 | 2,424,242 | 22,791 | 935,311 | 958,102 | ||||||||||||||||||
| Interest income | — | 675,116 | 675,116 | — | 890,463 | 890,463 | ||||||||||||||||||
| Interest expense | (389,328 | ) | (34,019 | ) | (423,347 | ) | (415,453 | ) | (35,833 | ) | (451,286 | ) | ||||||||||||
| Total other income (expense), net | (374,298 | ) | 3,050,309 | 2,676,011 | (392,662 | ) | 1,789,941 | 1,397,279 | ||||||||||||||||
| Loss before income taxes | $ | (3,379,553 | ) | $ | (458,588 | ) | (3,838,141 | ) | $ | (151,547 | ) | $ | (3,641,420 | ) | (3,792,967 | ) | ||||||||
| (Provision) benefit for income taxes | — | — | ||||||||||||||||||||||
| Net loss | (3,838,141 | ) | (3,792,967 | ) | ||||||||||||||||||||
| Less: Net income loss attributable to noncontrolling interest | (234 | ) | (382 | ) | ||||||||||||||||||||
| Net loss attributable to Dynacq Healthcare, Inc. | $ | (3,838,375 | ) | $ | (3,793,349 | ) | ||||||||||||||||||
| Operational statistics (Number of medical procedures) for Pasadena facility: | ||||||||||||||||||||||||
| Inpatient: | ||||||||||||||||||||||||
| Bariatric | 21 | 74 | ||||||||||||||||||||||
| Orthopedic | 71 | 46 | ||||||||||||||||||||||
| Other | 7 | 26 | ||||||||||||||||||||||
| Total inpatient procedures | 99 | 146 | ||||||||||||||||||||||
| Outpatient: | ||||||||||||||||||||||||
| Orthopedic | 286 | 257 | ||||||||||||||||||||||
| Other | 533 | 485 | ||||||||||||||||||||||
| Total outpatient procedures | 819 | 742 | ||||||||||||||||||||||
| Total procedures | 918 | 888 | ||||||||||||||||||||||
21
Comparison of the Fiscal Years Ended August 31, 2015 and August 31, 2014
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 $3.9 million in interest payable as accrued liabilities. For a detailed discussion of this, see Revenue Recognition discussed in Item 8 - Notes to Consolidated Financial Statements.
Net patient service revenue decreased by $3,220,425, or 32%, from $10,218,309 to $6,997,884, and total surgical cases increased by 3% from 888 cases for the fiscal year ended August 31, 2014 to 918 cases for the fiscal year ended August 31, 2015. While the number of cases increased by 3%, net patient service revenue decreased by 32%, primarily due to a change in the surgical mix of cases. The gross billed charges increased by 3% from $30,459,347 for the fiscal year ended August 31, 2014 to $31,418,070 for the fiscal year ended August 31, 2015. However, due to an increase in allowances from 66% to 78%, net patient service revenue decreased by 32%. The increase in allowances is due to an increased pressure by insurance carriers towards lower reimbursements, and also due to lower collections in the current period compared to the prior period on old accounts receivable that was fully reserved for.
Total costs and expenses increased by $25,945, from $9,977,194 for the fiscal year ended August 31, 2014 to $10,003,139 for the fiscal year ended August 31, 2015. The following discusses the various changes in costs and expenses:
| · | Compensation and benefits increased by $216,401, or 5%, primarily associated with increase in workforce due to higher gross billed charges and general increases in pay rates. |
| · | Medical services and supplies expenses decreased by $499,066, or 24%, primarily due to a change in the surgical mix of cases. Inpatient cases decreased by 32%, which generally require more medical services and supplies. |
| · | Other operating expenses increased by $327,214, or 10%, primarily associated with higher gross billed charges, and also due to higher professional fees incurred for implementation of electronic medical records. |
Other expense for the fiscal years ended August 31, 2015 and 2014 of $374,298 and $392,662 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 decreased from $2,242,388 for the fiscal year ended August 31, 2014 to $2,128,321 for the year ended August 31, 2015, primarily due to a reduction in corporate staff, partially offset by general increases in pay rates. Compensation and benefits also includes $170,011 and $197,364 of non-cash compensation expense for the fiscal years ended August 31, 2015 and 2014, 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 $1,807,316, from $3,185,139 for the fiscal year ended August 31, 2014 to $1,377,823 for the fiscal year ended August 31, 2015. Other operating expenses in fiscal year 2014 was high due to settlement of various lawsuits discussed in Item 3 - Legal Proceeding.
Rent and other income increased by $1,473,901, from $935,311 for the fiscal year ended August 31, 2014 to $2,409,212 for the fiscal year ended August 31, 2015. Rent and other income for the fiscal year ended August 31, 2015 includes (a) a gain of $2,094,000 on a bond called during the current period, (b) collections of $442,013 on accounts receivable of the Company’s hospitals that were sold in prior years, and were fully reserved for, (c) rent income of $116,916, and (c) miscellaneous other income of $156,444. These gains were offset by an amount of $400,162 in foreign currency losses. Rent and other income for the fiscal year ended August 31, 2014 includes (a) collections of $681,660 on accounts receivable of the Company’s hospitals that were sold in prior years, and were fully reserved for, (b) a gain of $161,864 in trading securities, (c) rent income of $60,199, and (d) miscellaneous other income of $31,588.
Interest income of $675,116 and $890,463 for the fiscal years ended August 31, 2015 and 2014, respectively, are primarily related to the Company’s investments in bonds.
22
Investments in securities
The Company’s investments in corporate debt instruments 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 August 31, 2015, these securities are valued at approximately $10.9 million. Unrealized gains in these investments of $7.1 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as of August 31, 2015. During the fiscal year ended August 31, 2015, one particular security was called with sales proceeds of $6 million, on which the Company had a gain of approximately $2.1 million.
During the fiscal years ended August 31, 2014, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains of $161,864 in these securities. During the first quarter of the fiscal year 2014, the Company sold all of its trading securities and has not held any such securities since November 30, 2013.
Income Taxes
The Company did not recognize a benefit or provision for income taxes for the fiscal years ended August 31, 2015 and 2014, 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
The Company maintained sufficient liquidity to meet its business needs in fiscal year 2015. As of August 31, 2015, its principal source of liquidity was $17.3 million in cash and net accounts receivable, and $10.9 million in investments in available-for-sale securities. The Company has approximately $15.8 million in cash as of August 31, 2015, the majority of which is deposited in national and international banks. The amounts at these financial institutions in Hong Kong are substantially in excess of Hong Kong Deposit Protection Board insurance limits and in the U.S. are substantially in excess of FDIC and Securities Investor Protection Corporation insurance limits; however, management believes that these financial institutions are of high quality and the risk of loss is minimal.
Cash flows from operating activities
Cash flow used in operating activities was $6,412,099 during fiscal year 2015, primarily due to (a) a net loss of $3,838,141, (b) a decrease in accounts payable and accrued liabilities of $2,285,531, and (c) a gain of $2,094,000 on sale of an available for sale security. Partially offsetting these cash outflows were (a) a decrease in accounts receivable and accounts receivable, other of $745,446, (b) foreign currency losses of $304,862, and (c) depreciation and amortization of $347,198.
Cash flows from investing activities
Cash flow provided by investing activities was $5,620,088, primarily due to sales proceeds of $6,000,000 of available for sale securities, which was partially offset by purchase of equipment of $384,162.
Cash flows from financing activities
Cash flow used in financing activities was $198,144 for purchase of treasury stock of $164,898 and payments on capital leases and notes payable of $33,246.
The Company had working capital of $645,535 as of August 31, 2015, and maintained a liquid position by a current ratio of approximately 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.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on us.
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Contractual Obligations and Commitments
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 $3.9 million in interest payable as accrued liabilities. For a detailed discussion of this, see Revenue Recognition discussed above.
Total rent and lease expenses paid by the Company for the fiscal years 2015 and 2014 were approximately $102,000 and $106,000, respectively. The Company’s total minimum rental commitments under noncancellable operating leases are approximately $389,000 of which $92,000, $86,000, $86,000, $86,000, $37,000 and $1,800 are payable in fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter, respectively.
The Company has contracts with doctors to manage various areas of the Company's hospital and other service agreements. Payments made under these agreements for the fiscal years ended August 31, 2015 and 2014 were $1,101,000 and $1,145,000, respectively. The Company’s minimum commitments under these contracts are approximately $1,074,000, all of which is payable in fiscal year 2016.
The Company has administrative support services agreements with outside organizations for administrative support services. Payments made related to these agreements for fiscal years 2015 and 2014 were $722,000 and $388,000, respectively. The Company has a total commitment of approximately $2,236,000, of which $652,000, $396,000, $264,000, $264,000, $264,000 and $396,000 are payable in fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter, respectively, related to these administrative support services agreements.
Total advertising expenses paid by the Company for the fiscal years 2015 and 2014 were approximately $477,000 and $471,000, respectively. The Company has agreements with outside organizations that offer marketing services in areas serviced by the Pasadena facility. The Company has a total commitment of approximately $221,000, of which $204,000 is payable in fiscal year 2016 and $17,000 in fiscal year 2017 related to these marketing agreements.
The Company has purchased some equipment under capital leases, and has a total commitment to pay $43,000 under these leases, of which $32,000 is payable in fiscal year 2016, and $11,000 in 2017.
These commitments mentioned above total $19.2 million, of which $17.3 million is payable in fiscal year 2016, $510,000 in 2017, $350,000 in 2018, $350,000 in 2019, $301,000 in 2020 and $398,000 thereafter.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements - Recent Accounting Pronouncements, which is incorporated here by reference.
Inflation
Inflation has not significantly impacted the Company's financial position or operations.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Not required.
24
| Item 8. | Financial Statements and Supplementary Data. |
INDEX TO FINANCIAL STATEMENTS
Below is an index to the consolidated financial statements and notes thereto contained in Item 8, Financial Statements and Supplementary Data.
25
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Dynacq Healthcare, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Dynacq Healthcare, Inc. (the "Company"), as of August 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the two-year period ended August 31, 2015. Dynacq Healthcare, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dynacq Healthcare, Inc. as of August 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended August 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
| /s/ Briggs & Veselka | |
| Briggs & Veselka | |
| Houston, Texas | |
| November 30, 2015 |
26
Consolidated Balance Sheets
| August 31, | ||||||||
| 2015 | 2014 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 15,829,349 | $ | 16,819,504 | ||||
| Accounts receivable, net of allowances of approximately $38,738,000 and $38,117,000 | 1,466,243 | 1,986,633 | ||||||
| Accounts receivable, other | 155,400 | 380,456 | ||||||
| Inventories | 257,778 | 298,662 | ||||||
| Interest receivable | 54,134 | 122,041 | ||||||
| Prepaid expenses | 129,429 | 262,944 | ||||||
| Total current assets | 17,892,333 | 19,870,240 | ||||||
| Investments available-for-sale | 10,938,811 | 20,678,130 | ||||||
| Property and equipment, net | 6,261,100 | 6,224,136 | ||||||
| Income tax receivable | 800,920 | 800,920 | ||||||
| Other assets | 187,101 | 187,101 | ||||||
| Total assets | $ | 36,080,265 | $ | 47,760,527 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
27
Consolidated Balance Sheets (continued)
| August 31, | ||||||||
| 2015 | 2014 | |||||||
| Liabilities and equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 981,112 | $ | 1,015,856 | ||||
| Accrued liabilities | 16,235,138 | 18,512,986 | ||||||
| Current portion of notes payable | — | 6,734 | ||||||
| Current portion of capital lease obligations | 30,548 | 26,513 | ||||||
| Total current liabilities | 17,246,798 | 19,562,089 | ||||||
| Non-current liabilities: | ||||||||
| Long-term portion of capital lease obligations | 10,576 | 41,123 | ||||||
| Total liabilities | 17,257,374 | 19,603,212 | ||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| Dynacq stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued or outstanding | — | — | ||||||
| Common stock, $.001 par value; 100,000,000 shares authorized, 13,715,849 shares issued and 13,601,624 shares outstanding at August 31, 2015; 14,418,626 shares issued and 13,888,010 shares outstanding at August 31, 2014 | 13,716 | 14,419 | ||||||
| Treasury stock, 114,225 and 530,616 at August 31, 2015 and 2014, at cost | (5,825 | ) | (27,061 | ) | ||||
| Additional paid-in capital | 10,491,386 | 10,479,745 | ||||||
| Accumulated other comprehensive income | 7,087,889 | 12,616,346 | ||||||
| Retained earnings | 1,171,686 | 5,010,061 | ||||||
| Total Dynacq stockholders’ equity | 18,758,852 | 28,093,510 | ||||||
| Non-controlling interest | 64,039 | 63,805 | ||||||
| Total equity | 18,822,891 | 28,157,315 | ||||||
| Total liabilities and equity | $ | 36,080,265 | $ | 47,760,527 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Net patient service revenue | $ | 6,997,884 | $ | 10,218,309 | ||||
| Costs and expenses: | ||||||||
| Compensation and benefits | 6,408,232 | 6,305,898 | ||||||
| Medical services and supplies | 1,607,788 | 2,106,854 | ||||||
| Other operating expenses | 5,148,818 | 6,628,920 | ||||||
| Depreciation and amortization | 347,198 | 366,883 | ||||||
| Total costs and expenses | 13,512,036 | 15,408,555 | ||||||
| Operating loss | (6,514,152 | ) | (5,190,246 | ) | ||||
| Other income (expense): | ||||||||
| Rent and other income | 2,424,242 | 958,102 | ||||||
| Interest income | 675,116 | 890,463 | ||||||
| Interest expense | (423,347 | ) | (451,286 | ) | ||||
| Total other income, net | 2,676,011 | 1,397,279 | ||||||
| Loss before income taxes | (3,838,141 | ) | (3,792,967 | ) | ||||
| (Provision) benefit for income taxes | — | — | ||||||
| Net loss | (3,838,141 | ) | (3,792,967 | ) | ||||
| Less: Net income attributable to noncontrolling interest | (234 | ) | (382 | ) | ||||
| Net loss attributable to Dynacq Healthcare, Inc. | $ | (3,838,375 | ) | $ | (3,793,349 | ) | ||
| Basic and diluted loss per common share attributable to Dynacq Healthcare, Inc. | $ | (0.28 | ) | $ | (0.26 | ) | ||
| Basic and diluted average common shares outstanding attributable to Dynacq Healthcare, Inc. | 13,734,323 | 14,387,425 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Comprehensive Income (Loss)
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Net loss | $ | (3,838,141 | ) | $ | (3,792,967 | ) | ||
| Other comprehensive income (loss), net of taxes: | ||||||||
| Net change in fair value of available-for-sale securities, net of taxes of $-0- and $-0- | (5,528,457 | ) | 3,234,012 | |||||
| Other comprehensive income (loss) | (5,528,457 | ) | 3,234,012 | |||||
| Comprehensive loss | (9,366,598 | ) | (558,955 | ) | ||||
| Less comprehensive income attributable to noncontrolling interest | (234 | ) | (382 | ) | ||||
| Comprehensive loss attributable to Dynacq Healthcare, Inc. | $ | (9,366,832 | ) | $ | (559,337 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Changes in Equity
| Common Stock | Treasury Stock | Accumulated Other | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional | Unrealized
gains (losses) on securities | Retained | Non- | Total | ||||||||||||||||||||||||||||
| Balance, August 31, 2013 | 14,543,626 | $ | 14,544 | — | $ | — | $ | 10,282,256 | $ | 9,382,334 | $ | 8,803,410 | $ | 63,423 | $ | 28,545,967 | ||||||||||||||||||||
| Treasury shares acquired | — | — | 655,616 | (27,061 | ) | — | — | — | — | (27,061 | ) | |||||||||||||||||||||||||
| Treasury shares cancelled | (125,000 | ) | (125 | ) | (125,000 | ) | — | 125 | — | — | — | — | ||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | 197,364 | — | — | — | 197,364 | |||||||||||||||||||||||||||
| Unrealized gains on securities available-for-sale, net of taxes of $-0- | — | — | — | — | — | 3,234,012 | — | — | 3,234,012 | |||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | (3,793,349 | ) | 382 | (3,792,967 | ) | |||||||||||||||||||||||||
| Balance, August 31, 2014 | 14,418,626 | 14,419 | 530,616 | (27,061 | ) | 10,479,745 | 12,616,346 | 5,010,061 | 63,805 | 28,157,315 | ||||||||||||||||||||||||||
| Treasury shares acquired | — | — | 286,386 | (137,837 | ) | — | — | — | — | (137,837 | ) | |||||||||||||||||||||||||
| Treasury shares cancelled | (702,777 | ) | (703 | ) | (702,777 | ) | 159,073 | (158,370 | ) | — | — | — | — | |||||||||||||||||||||||
| Stock based compensation | — | — | — | — | 170,011 | — | — | — | 170,011 | |||||||||||||||||||||||||||
| Reclassification adjustment for gain on call of securities, available-for-sale, net of taxes of $-0- | — | — | — | — | — | (2,094,000 | ) | — | — | (2,094,000 | ) | |||||||||||||||||||||||||
| Unrealized losses on securities available-for-sale, net of taxes of $-0- | — | — | — | — | — | (3,434,457 | ) | — | — | (3,434,457 | ) | |||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | (3,838,375 | ) | 234 | (3,838,141 | ) | |||||||||||||||||||||||||
| Balance, August 31, 2015 | 13,715,849 | $ | 13,716 | 114,225 | $ | (5,825 | ) | $ | 10,491,386 | $ | 7,087,889 | $ | 1,171,686 | $ | 64,039 | $ | 18,822,891 | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
.
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Consolidated Statements of Cash Flows
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (3,838,141 | ) | $ | (3,792,967 | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Depreciation and amortization | 347,198 | 366,883 | ||||||
| Gain on sale of assets | (4,250 | ) | — | |||||
| Gain on available-for-sale and trading securities | (2,094,000 | ) | (161,864 | ) | ||||
| Stock based compensation | 170,011 | 197,364 | ||||||
| Foreign currency exchange losses | 304,862 | 14,792 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 520,390 | (924,604 | ) | |||||
| Accounts receivable, other | 225,056 | (380,456 | ) | |||||
| Inventories | 40,884 | (5,097 | ) | |||||
| Prepaid expenses | 133,515 | (82,061 | ) | |||||
| Interest receivable | 67,907 | (19,077 | ) | |||||
| Income tax receivable | — | 569,430 | ||||||
| Accounts payable | (34,744 | ) | 3,527 | |||||
| Accrued liabilities | (2,250,787 | ) | 6,640,608 | |||||
| Net cash from operating activities | (6,412,099 | ) | 2,426,478 | |||||
| Cash flows from investing activities | ||||||||
| Sale proceeds of available-for-sale securities | 6,000,000 | — | ||||||
| Sale proceeds of trading securities | — | 1,233,286 | ||||||
| Sales proceeds of equipment | 4,250 | — | ||||||
| Purchase of equipment | (384,162 | ) | (267,362 | ) | ||||
| Net cash from investing activities | 5,620,088 | 965,924 | ||||||
| Cash flows from financing activities | ||||||||
| Principal payments on notes payable | (6,734 | ) | (40,266 | ) | ||||
| Purchase of treasury stock | (164,898 | ) | — | |||||
| Payments on capital lease | (26,512 | ) | (118,079 | ) | ||||
| Net cash from financing activities | (198,144 | ) | (158,345 | ) | ||||
| Net change in cash and cash equivalents | (990,155 | ) | 3,234,057 | |||||
| Cash and cash equivalents at beginning of year | 16,819,504 | 13,585,447 | ||||||
| Cash and cash equivalents at end of year | $ | 15,829,349 | $ | 16,819,504 | ||||
| Supplemental cash flow disclosures | ||||||||
| Cash paid during year for: | ||||||||
| Interest | $ | 2,954 | $ | 23,118 | ||||
| Income taxes | $ | — | $ | — | ||||
| Non-cash investing and financing activities: | ||||||||
| Unrealized change in fair value of available-for-sale securities | $ | (5,528,457 | ) | $ | 3,234,012 | |||
| Purchase of treasury stock | — | 27,061 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Notes to Consolidated Financial Statements
| 1. | Significant Accounting Policies |
Business and Organization
Dynacq Healthcare, Inc., a Nevada corporation (the “Company”), is a holding company that through its subsidiaries in the United States develops and manages one general acute care hospital that principally provide specialized surgeries. The Company through its United States subsidiaries owns and operates one general acute care hospital in Pasadena, Texas. The Company through its subsidiary in Hong Kong invests in debt and equity securities, including short-term investments in initial public offerings and pre-initial public offerings.
The Company was incorporated under the laws of the State of Nevada in 1992. The Company was reincorporated in Delaware in November 2003 and reincorporated back in Nevada in August 2007.
U.S. Division
In the United States, the Company manages and operates one general acute care hospital that principally provides specialized surgeries such as bariatric, orthopedic and neuro-spine surgeries.
In May 1998, Vista Community Medical Center, L.L.C., a Texas limited liability company, was organized for the purpose of operating a hospital (the "Pasadena facility"). In June 2003, the Pasadena facility was converted to a limited liability partnership. As of August 31, 2015 and 2014, the Company through its subsidiaries had a 100% and 98%, respectively, ownership interest in the Pasadena facility.
Corporate Division
The Company formed Sino Bond Inc. Limited, a Hong Kong corporation (“Sino Bond”) to hold and manage investments in Hong Kong. Sino Bond invests in debt and equity securities in Europe and Asia, including initial public offerings and pre-initial public offerings.
Reclassification
Certain previously reported financial information has been reclassified to conform to the current year’s presentation. The impact of such reclassification was not significant to the prior year’s overall presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for annual financial information and with the instructions to Form 10-K and Article 3 and 3-A of Regulation S-X. The majority of the Company's expenses are "cost of revenue" items. Costs that could be classified as general and administrative by the Company would include the corporate office costs, which were approximately $4.0 million and $5.9 million for the fiscal years 2015 and 2014, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The most significant of the Company's estimates is the determination of revenue to recognize for the services the Company provides and the determination of allowances, which includes the contractual allowances and the provision for doubtful accounts. See “Revenue Recognition” below for further discussion. Actual results could differ materially from those estimates used in preparation of these financial statements.
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Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturities of three months or less on the date of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Investments in Available-for-Sale and Trading Securities
The Company’s investments in corporate debt instruments 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. These investments are subject to default risk. Unrealized gains in the fair value are reported in accumulated other comprehensive income, net of related income tax effect. The Company regularly monitors its investment portfolio for any decline in fair value that is other than temporary and records any such impairment as an impairment loss. The determination of the gain or loss on the sale of any security is made using the specific identification method. During the fiscal year ended August 31, 2015, one particular security was called with sales proceeds of $6 million, on which the Company had a gain of approximately $2.1 million. As of August 31, 2015, the balance of these securities is valued at approximately $10.9 million.
The Company also invested in initial public offerings of equity securities on the Hong Kong Stock Exchange. These investments were classified as trading securities, and were carried at fair value. These investments were subject to fluctuations in the market price. During the fiscal years ended August 31, 2014, the Company had a net gain of $161,864 in these securities. During the first quarter of fiscal year 2014, the Company sold all of its trading securities and has not held any such securities since November 30, 2013.
Note Payable
In November 2011, the Company borrowed $116,339 as notes payable from a financial institution at an interest rate of 4.5%, which was to be repaid in 36 monthly installments, and was secured by specific equipment purchased at our Pasadena facility. The Company paid down the balance of $6,734 of notes payable during the fiscal year ended August 31, 2015.
Inventories
Inventories, consisting primarily of medical supplies, are stated at the lower of cost or market, with cost determined by use of the average cost method.
Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Expenditures which extend the physical or economic life of the assets are capitalized and depreciated.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from five to 39 years. The Company has classified its assets into three categories. The categories are listed below, along with the useful life for each category.
| Useful Life | ||
| Land | N/A | |
| Buildings and improvements | 39 years | |
| Equipment, furniture and fixtures | 5 years |
The Company also leases equipment under capital leases. Such assets are amortized on a straight-line basis over the lesser of the term of the lease or the remaining useful life of the assets.
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Impairment of Long-lived Assets
The Company evaluates the carrying value of property, plant and equipment and definite-lived assets whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations. If impairment exists, the net book values are reduced to fair values as warranted.
Fair Value of Financial Instruments
The fair value of financial instruments is estimated based on market trading information, where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. Management believes that the carrying amount of cash and cash equivalents, accounts receivable and accrued liabilities approximate fair value. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
| Level 1 | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted price for identical or similar assets and liabilities in markets that are not active; or other input that are observable or can be corroborated by observable market data. |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
The following table summarizes our financial assets and liabilities measured and reported in the Company’s statement of financial position at fair value on a recurring basis as of August 31, 2015, segregated among the appropriate levels within the fair value hierarchy:
| Quoted prices in active markets for identical | Significant other observable inputs | Significant unobservable | ||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||
| Assets | ||||||||||||
| Investments available-for-sale | $ | — | $ | 10,938,811 | $ | — | ||||||
The Company’s investments in Level 2 are in perpetual corporate debt instruments traded on the European markets, at a cost of $4,078,630, 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), and there has been no change in valuation techniques for these investments (Level 2).
The carrying amounts of cash and cash equivalents, current receivables, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The carrying amounts of the Company's short-term borrowings at August 31, 2015 and 2014 approximate their fair value.
Revenue Recognition
Background
The Company's revenue recognition policy is significant because net patient service revenue is a primary component of its results of operations. Revenue is recognized as services are delivered. The determination of the amount of revenue to be recognized in connection with the Company's services is subject to significant judgments and estimates, which are discussed below.
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Revenue Recognition Policy
The Company has established billing rates for its medical services which it bills as services are delivered. Gross billings are then reduced by the Company’s estimate of allowances, which includes the contractual allowance and the provision for doubtful accounts, to arrive at net patient service revenues. Net patient service revenues may not represent amounts ultimately collected. The Company adjusts current period revenue for differences in estimated revenue recorded in prior periods and actual cash collections. Overall, our revenue is driven by the number and surgical mix of cases, as well as, the timing and amount collected for older accounts receivable that are fully reserved for.
The following table shows gross revenues and allowances for fiscal years 2015 and 2014:
| 2015 | 2014 | |||||||
| Gross billed charges | $ | 31,418,070 | $ | 30,459,347 | ||||
| Allowances | 24,420,186 | 20,241,038 | ||||||
| Net revenue | $ | 6,997,884 | $ | 10,218,309 | ||||
| Allowance percentage | 78 | % | 66 | % | ||||
The table below sets forth the percentage of our gross patient service revenue by financial class for the fiscal years 2015 and 2014:
| 2015 | 2014 | |||||||
| Workers' Compensation | 30 | % | 19 | % | ||||
| Commercial | 38 | % | 42 | % | ||||
| Medicare | 21 | % | 23 | % | ||||
| Medicaid | 1 | % | 1 | % | ||||
| Self-Pay | 7 | % | 13 | % | ||||
| Other | 3 | % | 2 | % | ||||
Contractual Allowance
The Company computes its contractual allowance based on the estimated collections on its gross billed charges. The Company computes its estimate by taking into account collections received, up to 30 days after the end of the period, for the services performed and also estimating amounts collectible for the services performed within the last six months. A significant amount of our net revenue results from Texas workers' compensation claims, which are governed by the rules and regulations of the Texas Department of Workers’ Compensation (“TDWC”) and the workers’ compensation healthcare networks. If our hospital chooses to participate in a network, the amount of revenue that will be generated from workers’ compensation claims will be governed by the network contract.
For claims arising prior to the implementation of workers’ compensation networks and out of network claims, inpatient and outpatient surgical services are either reimbursed pursuant to the Acute Care In-Patient Hospital Fee Guideline or at a "fair and reasonable" rate for services in which the fee guideline is not applicable. Starting March 1, 2008, the Texas Workers’ Compensation 2008 Acute Care Hospital Outpatient and Inpatient Facility Fee Guidelines (the “Guidelines”) became effective. Under these Guidelines, the reimbursement amounts are determined by applying the most recently adopted and effective Medicare reimbursement formula and factors; however, if the maximum allowable reimbursement for the procedure performed cannot be calculated using these Guidelines, then reimbursement is determined on a fair and reasonable basis.
Should we disagree with the amount of reimbursement provided by a third-party payer, we are required to pursue the medical dispute resolution (“MDR”) process at the TDWC to request proper reimbursement for services. From January 2007 to November 2008, the Company had been successful in its pursuit of collections regarding the stop-loss cases pending before the State Office of Administrative Hearings (“SOAH”), receiving positive rulings in over 90% of its claims presented for administrative determination. A 2007 district court decision upholding our interpretation of the statute as applied to the stop-loss claims was appealed by certain insurance carriers, and on November 13, 2008 the Third Court of Appeals determined that in order for a hospital to be reimbursed at 75% of its usual and customary audited charges for an inpatient admission, the hospital must not only bill at least $40,000, but also show that the admission involved unusually costly and unusually extensive services. Procedurally, the decision means that each case where a carrier raised an issue regarding whether the services provided were unusually costly or unusually extensive would be remanded to either SOAH or MDR for a case-by-case determination of whether the services provided meet these standards. As a result of the Third Court of Appeals opinion, any stop-loss cases pending at SOAH have been remanded to the TDWC since these cases have not been reviewed or decided by the two-prong standard decided by the Third Court of Appeals. The SOAH Administrative Law judges determined that the most appropriate location for these cases is the TDWC.
36
A petition asking the Texas Supreme Court to review the Third Court of Appeals decision was denied. Therefore, the Company is bound by the Third Court of Appeals decision. The Texas Supreme Court’s decision delayed final adjudication in these pending stop-loss cases. The uncertain outcome in these cases will depend on a very lengthy process. We anticipate further, lengthy litigation at the Travis County District Courts and the Texas Courts of Appeals. Because of this lengthy process and the uncertainty of recovery in these cases, collection of a material amount of funds in these pending stop-loss cases cannot be anticipated.
Through August 2015, 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 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, and in January 2014, the Company received the deposits and accrued interest totaling $4.2 million. 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 were appealed to the Court of Appeals and the funds ordered refunded were deposited with the district clerk. As with the other 47 cases, the Court of Appeals reversed the district court’s final judgments in these three cases and the Company filed motions with the district court asking that the district clerk be ordered to release the deposited funds to the Company, and in February 2014, the Company received the deposits and accrued interest totaling approximately $300,000. The total refund received by the Company in fiscal year 2014 for the 50 stop-loss cases discussed above was $4,476,097.
During the time that the carriers’ petitions seeking refunds were pending, because of the uncertainty of the results at that time, as of August 31, 2015, the Company has accrued the total potential refund amount of $11.3 million, and an additional amount of $3.9 million in interest payable, as accrued liabilities. This includes the deposit amounts refunded back to the Company in January and February 2014. We do not anticipate that any other carriers will pursue refund demands through district court but instead will pursue them administratively through TDWC, if at all. 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. The carriers contend that the voluntary payments made pursuant to the Decisions and Orders were premature payments by the carriers and may be ordered to be refunded. The Company disagrees with this contention. 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. In March 2014, a settlement conference with one self-insured entity successfully resolved the stop-loss cases in which that entity was involved. A few carriers engaged in settlement negotiations which resulted in settlements and a few negotiations are on-going. Although the Company is willing to participate in settlement negotiations, we anticipate that few, if any, other carriers are interested in doing so at this time. The Company dismissed 156 cases from the stop-loss docket based on its determination that these cases did not satisfy the “unusually cost” and “unusually extensive” standard. It is anticipated that hearings at SOAH on approximately 460 of the pending stop-loss cases still on the docket will begin in December 2015.
37
Due to the uncertainties associated with these stop-loss fee dispute cases, the Company recognized increases in the contractual allowance at our Pasadena facility of $10,254,990 during fiscal year 2011 and $149,875 during the fiscal quarter ended August 31, 2013, (and an additional contractual allowance amount of $779,583 during fiscal year 2011 and $136,542 during the fiscal quarter ended August 31, 2013, at our Garland facility, which was classified as discontinued operations). The Company has also recognized interest expense related to these refunds starting from fiscal year 2011.
Some claims regarding payment for ambulatory surgical center and hospital outpatient services remain pending at the TDWC and/or SOAH. It is expected that these remaining claims will be adjudicated at SOAH and possibly in the Texas district and appellate courts. The basis for reimbursement for these services made the subject of these pending cases is the same as it was for the other ASC and outpatient cases that have been either tried or settled: the determination of “fair and reasonable” charges. In 2007, the Company received unfavorable rulings from SOAH in all of its appeals of unfavorable decisions related to services provided in 2001 and 2002. The 179 cases, which were appealed to the Travis County district courts, challenged the constitutionality of the relevant statutory language. The Company received an unfavorable ruling in its lead case in March 2009, which ruling was appealed to and was upheld by the Third Court of Appeals on August 26, 2010. The Texas Supreme Court denied a petition asking for review of the Third Court of Appeals decision. The unfavorable interpretation by the Texas Courts of Appeal in the Company’s lead case negatively affects the recovery of additional reimbursement, not only in the lead case, but in the remaining 178 pending cases. Consequently, the Company is bound by the Third Court of Appeals’ ruling that interprets the applicable statute and fee guideline to require that the amount that will be paid to a provider must not only be at a “fair and reasonable rate” but also must “ensure the quality of medical care” and “achieve effective cost control” and be the same or less than that charged to others with an equivalent standard of living. This ruling has impacted cases in which a fee guideline was not applicable, specifically all pending cases involving ambulatory surgical services provided from 2001 through 2004 as well as all pending cases involving hospital outpatient services provided prior to March 1, 2008, when the Guidelines took effect. Since the Third Court of Appeals’ unfavorable ruling, collection, if any, in these cases depends on the Company’s ability to establish the criteria in this ruling. The Company was given the opportunity to establish the criteria in approximately 80 cases, which were set for hearing on the merits from March through May 2012 and was unsuccessful. In 2014, hearings were held in 23 of the Company’s hospital outpatient cases at SOAH. Decisions and Orders were handed down by SOAH adopting the methodology for determining “fair and reasonable” reimbursement that was put forth by the Company and ordered additional reimbursement in each of the 23 cases plus interest be paid to the Company. The carrier has appealed these decisions to Travis County district court and the cases have been consolidated. In April 2015, a large group of outpatient cases with various carriers were tried at SOAH. On November 6, 2015, a Decision and Order was handed down which applied to the 516 cases that were tried in April. The Decision and Order held that under the “fair and reasonable” reimbursement standard, the Company was entitled to additional compensation in each of the 516 cases and specified the additional amounts to be paid by each carrier. It is unknown at this time whether the Decision and Order will be appealed.
Due to the uncertainties regarding the accounts receivable in the MDR process, the 2008 and 2010 Third Court of Appeals’ opinions and our legal counsel’s advice that settlements with insurance carriers in stop-loss cases had virtually stopped, the Company had fully reserved all accounts receivable related to the MDR process as of August 31, 2008. The Company has had and continues to have settlement negotiations with insurance carriers for stop-loss, ambulatory surgical center and hospital outpatient cases. Some of these negotiations have been successful. Any monies collected for these MDR accounts receivable is recorded as current period’s net patient service revenues.
Provision for Doubtful Accounts
Although outcomes vary, our policy is to attempt to collect amounts due from patients, including co-payments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations. In non-emergency circumstances or for elective procedures and services, it is our policy to verify insurance prior to a patient being treated; however, there are various exceptions that can occur.
38
The Company computes its allowances based on the estimated collections on its gross billed charges. The Company computes its estimate of allowance, which is a combination of contractual allowance and provision for doubtful accounts, by taking into account collections received, up to 30 days after the end of the period, for the services performed and also estimating amounts collectible for the services performed within the last six months.
Accounts receivable represent net receivables for services provided by the Company. At each balance sheet date management reviews the accounts receivable for collectability and provides full allowance reserves for any accounts receivable deemed uncollectible.
The allowances stated as a percentage of gross receivables at the balance sheet dates is larger than the allowance percentage used to reduce gross billed charges due to the application of partial cash collections to the outstanding gross receivable balances, without any adjustment being made to the allowances. The allowance amounts netted against gross receivables are not adjusted until such time as the final collections on an individual receivable are recognized.
The focal point of our business is providing patient care services, including complex orthopedic and bariatric procedures. The Company pursues optimal reimbursement from third-party payers for these services. In some instances, we do not have contractual arrangements with third-party payers which provide for “prompt payment” which may result in additional time to collect the expected reimbursement.
The collection process may also be extended due to our efforts to obtain all optimal reimbursement available to the Company. Specifically, for medical services provided to injured workers, the Company may initially receive reimbursement that may not be within the fee guidelines or regulatory guidelines mandating reimbursement. The Company reviews and pursues those particular claims that are determined to warrant additional reimbursement pursuant to the fee or regulatory guidelines. The Company's pursuit of additional reimbursement amounts that it believes are due under fee or regulatory guidelines may be accomplished through established dispute resolution procedures with applicable regulatory authorities.
Stock Based Compensation
The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense attributed is based on estimated forfeiture rate, which is updated based on actual forfeitures as appropriate. This option pricing model requires the input of highly subjective assumptions, including the expected volatility of our common stock, pre-vesting forfeiture rate and an option’s expected life. The financial statements include amounts that are based on the Company’s best estimates and judgments.
Advertising Costs
Advertising and marketing costs in the amounts of $478,000 and $471,000 for the fiscal years ended August 31, 2015 and 2014, respectively, were expensed as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under this method, deferred tax liabilities or assets are determined based on differences between the income tax basis and the financial reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. If the Company is uncertain about its ability to recognize benefit from net operating losses, it records a valuation allowance against deferred tax assets.
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Noncontrolling Interest
The equity of minority investors (minority investors are generally physician groups and other healthcare providers that perform surgeries at the Company's facilities) in certain subsidiaries of the Company is reported on the consolidated balance sheets as noncontrolling interest. Noncontrolling interest reported in the consolidated income statements reflect the respective interests in the income or loss of the limited partnerships or limited liability companies attributable to the minority investors (equity interest was 1% at August 31, 2015).
The following table sets forth the activity in the noncontrolling interest account for the fiscal years ended August 31, 2015 and 2014:
| Balance August 31, 2013 | $ | 63,423 | ||
| Income allocated to noncontrolling interest holders | 382 | |||
| Balance August 31, 2014 | 63,805 | |||
| Income allocated to noncontrolling interest holders | 234 | |||
| Balance August 31, 2015 | $ | 64,039 |
Net Loss per Share
Net loss per share has been computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share has been calculated to give effect to the dilutive effect of common stock equivalents consisting of stock options in years in which the Company has income. The calculation of dilutive shares outstanding excludes 771,654 options and 995,350 options outstanding as of August 31, 2015 and 2014, respectively, because their effect is antidilutive.
Foreign Currency Translation
The functional currency of the Company as a whole is the U.S. Dollar. The Company has designated the U.S. Dollar as the functional currency for Sino Bond in Hong Kong. The effects of foreign currency exchange adjustments are included as a component of Rent and Other Income in the Consolidated Statements of Operations.
Recent Accounting Pronouncements
No recent accounting pronouncements or other authoritative guidance has been issued that management considers likely to have a material impact on our consolidated financial statements.
2. Property and Equipment
At August 31, property and equipment consisted of the following:
| 2015 | 2014 | |||||||
| Land | $ | 497,110 | $ | 497,110 | ||||
| Buildings and improvements | 8,989,115 | 8,989,115 | ||||||
| Equipment, furniture and fixtures (including equipment under capital lease of $115,359 and $115,359) | 8,428,738 | 8,359,857 | ||||||
| 17,914,963 | 17,846,082 | |||||||
| Less accumulated depreciation and amortization (including amortization for equipment under capital lease of $61,525 and $38,453) | (11,653,863 | ) | (11,621,946 | ) | ||||
| Net property and equipment | $ | 6,261,100 | $ | 6,224,136 | ||||
For the fiscal years ended August 31, 2015 and 2014, depreciation and amortization expense was $347,198 and $366,883, respectively.
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3. Notes payable
At August 31, notes payable consisted of the following:
2015 | 2014 | |||||||
| Notes payable for $116,339 for purchase of equipment for the Pasadena facility at an interest rate of 4.5%, secured by the said equipment | $ | — | $ | 6,734 | ||||
| Less: Current portion | — | (6,734 | ) | |||||
| Long-term portion | $ | — | $ | — | ||||
4. Income Taxes
The provision (benefit) for income taxes consisted of the following:
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Current tax (benefit) expense: | ||||||||
| Federal | $ | – | $ | – | ||||
| State | – | – | ||||||
| Total current | – | – | ||||||
| Deferred tax (benefit) expense: | ||||||||
| Federal | – | – | ||||||
| State | – | – | ||||||
| Total deferred | – | – | ||||||
| Total income tax expense | $ | – | $ | – | ||||
The Company in fiscal years 2015 and 2014 continued to have operating losses. The Company believes that the likelihood of realizing future tax benefit for the deferred tax assets is low, and hence increased the valuation allowance to write-off the deferred tax assets.
Significant components of the Company's deferred tax liabilities and assets were as follows at August 31, 2015:
| Current | Noncurrent | |||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | $ | – | $ | (214,172 | ) | |||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | – | 9,265,994 | ||||||
| Revenue and expense differences | – | 5,344,194 | ||||||
| Allowance for uncollectible accounts | 513,456 | – | ||||||
| Other | 40,767 | 106,114 | ||||||
| Valuation allowance | (554,223 | ) | (14,502,130 | ) | ||||
| Net deferred tax asset (liability) | $ | – | $ | – | ||||
Significant components of the Company's deferred tax liabilities and assets were as follows at August 31, 2014:
| Current | Noncurrent | |||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | $ | – | $ | (210,814 | ) | |||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | – | 8,610,673 | ||||||
| Revenue and expense differences | (350,000 | ) | 5,197,056 | |||||
| Allowance for uncollectible accounts | 513,456 | – | ||||||
| Other | (163,456 | ) | (28,175 | ) | ||||
| Valuation allowance | – | (13,568,740 | ) | |||||
| Net deferred tax asset (liability) | $ | – | $ | – | ||||
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In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to the uncertainty of the Company’s ability to recognize the benefit from the net operating losses, the Company has recorded a full valuation allowance against the deferred tax assets as at August 31, 2015 and 2014.
The Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
The Company continues to pursue collections on its old accounts receivable for one of its ambulatory surgical center, which closed in November 2002. Since the Company has not given up on its collection efforts, instead of refunding $800,920 due to the Company based on bad debt claims on its tax return, the IRS has issued a Protective Claims letter, by which the Company will be able to pursue getting the refund once all collection efforts have been completed. The Company’s claims on these related accounts receivable remain pending at the Texas Department of Workers’ Compensation and/or State Office of Administrative Hearings. The Company does not expect these cases to be resolved in the next fiscal year; hence the income tax receivable of $800,920 is classified as a non-current asset in the Consolidated Balance Sheet as of August 31, 2015 and 2014.
A reconciliation of the benefit for income taxes with amounts determined by applying the statutory federal income tax rate to income before income taxes and noncontrolling interests is as follows:
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Benefit for income taxes computed using the statutory rate of 35% | $ | (1,343,349 | ) | $ | (1,327,538 | ) | ||
| Noncontrolling interest in income of consolidated subsidiaries | (82 | ) | (134 | ) | ||||
| Non-deductible expenses/other | (144,182 | ) | 901,932 | |||||
| Changes in valuation allowance | 1,487,613 | 425,740 | ||||||
| Expense for income taxes | $ | — | $ | — | ||||
The Company files tax returns in the U.S. federal, state of Texas and foreign jurisdictions. The federal statute limitation is open for tax year ending on and after August 31, 2013 and the State of Texas statute limitation is open for the report years 2013 through 2015. At August 31, 2015, we had approximately $26.5 million of federal net operating loss carryforwards, which, if not utilized, will expire at various dates from 2029 through 2035.
| 5. | Related Party Transactions |
The Company has retained Redwood Health Corporation (“Redwood”), to furnish physicians to provide in-house emergency medical coverage for its Pasadena facility at an hourly rate of $75. The Company’s Chief Executive Officer is a physician and the sole owner of Redwood. The Company paid $657,000 and $515,025 for emergency room physician services to Redwood in fiscal years 2014 and 2013, respectively.
During the fiscal year 2009, the Company retained Anesthesia Associates of Houston Metroplex to provide exclusive, continuous and uninterrupted anesthesiology services, including physicians and CRNAs, to the Pasadena facility for a monthly compensation of $5,000. The Company’s Chief Executive Officer is a physician and an affiliate of Anesthesia Associates of Houston Metroplex. The Company paid $60,000 for anesthesiology services to said organization in each of the fiscal years 2015 and 2014. During the fiscal year 2009, the Company also retained Redwood to locate and recruit additional skilled anesthesiologists and CRNAs for its Pasadena facility for a monthly compensation of $20,000. The Company paid $240,000 for said recruitment services to Redwood in each of the fiscal years 2015 and 2014. The Company entered into these two agreements in order to replace the previous anesthesiology group, whose contract terminated at the end of fiscal year 2009. The compensation which was being paid to the previous group was substantially the same as that being paid under the new contracts.
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The Company had purchased artifacts as inventory for re-sale in China during fiscal years 2010 and 2011. The purchase amount was paid by Mr. Chiu Chan, the Company’s former Chief Executive Officer. The amount payable to his estate of $229,317 as of August 31, 2014 is included in Accrued Liabilities in the Consolidated Balance Sheet as of August 31, 2014, and has been paid in June 2015.
| 6. | Stockholders' Equity and Stock Option Plan |
Preferred Stock
In January 1992, the Board approved an amendment to the Company's Articles of Incorporation to authorize 5,000,000 shares of undesignated preferred stock, for which the Board is authorized to fix the designation, powers, preferences and rights. There are no shares of preferred stock issued or outstanding.
Treasury Stock
In September 2013, as part of a settlement agreement with a former employee, the Company received 125,000 shares of common stock of the Company previously issued to him. These shares were accounted for as treasury shares with zero cost, and were cancelled in the second quarter of fiscal year 2014.
In August 2014 and April 2015, binding settlement agreements were reached with some of the shareholders in a law suit whereby Dynacq received 530,616 shares and 286,386 shares, respectively, of stock owned by the shareholders. Based on an independent appraisal, the value of these shares repurchased as treasury stock were $27,061 and $137,837, respectively. The Company cancelled 702,777 shares of treasury stock in August 2015.
Stock Option Plans
Year 2011 Stock Incentive Plan
The purpose of the Year 2011 Stock Incentive Plan (“2011 Plan”) is to strengthen the Company by providing an incentive to its employees, officers, consultants and directors and encouraging them to devote their abilities and industry to the success of the Company’s business enterprise. It is intended that this purpose be achieved by extending to employees, officers, consultants and directors of the Company and its subsidiaries an added long-term incentive for high levels of performance and unusual efforts through the grant of incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, performance awards and restricted stock. The Company has reserved 15,000,000 shares of common stock for issuance under the 2011 Plan. As of August 31, 2015, there remain 250,000 shares to be issued upon exercise of outstanding options, and 14,750,000 shares which can be issued under the 2011 Plan after giving effect to shares issued and canceled.
2000 Incentive Plan
The Company's 2000 Incentive Plan ("2000 Plan") provides for options and other stock-based awards that may be granted to eligible employees, officers, consultants and non-employee directors of the Company or its subsidiaries. The Company had reserved 5,000,000 shares of common stock for future issuance under the 2000 Plan. The 2000 Plan does not have a fixed termination date, provided that no incentive stock option can be granted subsequent to August 29, 2011. As of August 31, 2015, there remain 521,654 shares to be issued upon exercise of outstanding options, and no new stock options awards will be issued under the 2000 Plan.
The following table summarizes the stock option activities for the fiscal years ended August 31, 2015 and 2014 (share amounts in thousands):
| Shares | Weighted Average Option Exercise Price Per Share | |||||||
| Outstanding, August 31, 2013 | 1,097 | $ | 2.21 | |||||
| Granted | — | — | ||||||
| Exercised | — | — | ||||||
| Expired or canceled | (102 | ) | 2.45 | |||||
| Outstanding, August 31, 2014 | 995 | 2.18 | ||||||
| Granted | — | — | ||||||
| Exercised | — | — | ||||||
| Expired or canceled | (223 | ) | 4.14 | |||||
| Outstanding, August 31, 2015 | 772 | 1.61 | ||||||
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For the fiscal years ended August 31, 2015 and 2014, there were no stock options granted or exercised. The aggregate intrinsic value of the stock options outstanding as of August 31, 2015 and 2014 is $-0-, since the market price is lower than the exercise price.
The following summarizes information related to stock options outstanding as of August 31, 2015, and related weighted average price and life information:
| Options Outstanding | Options Exercisable | |||||||||||||
| Exercise Prices | Number of Shares | Weighted Average Remaining Contractual | Number of Shares | |||||||||||
| (Share Amounts In Thousands) | ||||||||||||||
| $ | 1.10 | 250 | 6.4 | 188 | ||||||||||
| $ | 1.86 | 522 | 5.9 | 522 | ||||||||||
| Total | 772 | 6.0 | 710 | |||||||||||
For the fiscal years ended August 31, 2015 and 2014, stock-based compensation expense associated with the Company’s stock options and stock grants was $170,011 and $197,364, respectively. The total unrecognized compensation expense for outstanding stock options as of August 31, 2015 was $11,000, and will be recognized, in general, over four months.
| 7. | Employee Benefit Plan |
The Company sponsors a 401(k) defined contribution plan covering substantially all employees of the Company and provides for voluntary contributions by these employees, subject to certain limits. The Company makes discretionary contributions to the plan. The Company's contributions for fiscal years 2015 and 2014 were $23,421 and $31,612, respectively.
| 8. | Net Loss Per Common Share |
The following table presents the computation of basic and diluted loss per common share attributable to the Company:
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Basic and diluted loss per common share: | ||||||||
| Numerator: | ||||||||
| Net loss | $ | (3,838,141 | ) | $ | (3,792,967 | ) | ||
| Less: Net income attributable to noncontrolling interest | (234 | ) | (382 | ) | ||||
| Net loss attributable to Dynacq Healthcare, Inc. | $ | (3,838,375 | ) | $ | (3,793,349 | ) | ||
| Denominator: | ||||||||
| Basic and diluted average common shares outstanding | 13,734,323 | 14,387,425 | ||||||
| Basic and diluted loss per common share | $ | (0.28 | ) | $ | (0.26 | ) | ||
Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net loss per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. However, if it is anti-dilutive, the dilutive effect of the stock options is not included in the calculation of diluted net loss per share. Stock options with exercise prices exceeding current market prices that were excluded from the computation of net loss per share amounted to 771,654 shares and 995,350 shares as of August 31, 2015 and 2014, respectively.
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| 9. | Accumulated Other Comprehensive Income |
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Available-for-sale securities | ||||||||
| Accumulated other comprehensive income balance, beginning of period | $ | 12,616,346 | $ | 9,382,334 | ||||
| Other comprehensive income (loss): | ||||||||
| Unrealized gains (losses), net of taxes of $-0- for all periods presented | (3,434,457 | ) | 3,234,012 | |||||
| Reclassification adjustments for gains included in rent and other income | (2,094,000 | ) | — | |||||
| Tax provision | — | — | ||||||
| Amount reclassified from accumulated other comprehensive income | (2,094,000 | ) | — | |||||
| Other comprehensive income (loss) | (5,528,457 | ) | 3,234,012 | |||||
| Accumulated other comprehensive income balance, end of period | $ | 7,087,889 | $ | 12,616,346 | ||||
| 10. | Accrued Liabilities |
Accrued liabilities at August 31 is as follows:
| 2015 | 2014 | |||||||
| MDR stop-loss cases accrual, including accrued interest | $ | 15,269,275 | $ | 14,848,882 | ||||
| Lawsuit settlements | — | 2,074,713 | ||||||
| Marketing fees liability | — | 300,000 | ||||||
| Payroll and related taxes | 297,583 | 399,724 | ||||||
| Property taxes | 193,782 | 179,621 | ||||||
| Year-end accruals of expenses and other | 474,498 | 710,046 | ||||||
| Total accrued liabilities | $ | 16,235,138 | $ | 18,512,986 | ||||
| 11. | Commitments and Contingencies |
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 $3.9 million in interest payable as accrued liabilities. For a detailed discussion of this, see Revenue Recognition discussed above.
Total rent and lease expenses paid by the Company for the fiscal years 2015 and 2014 were approximately $102,000 and $106,000, respectively. The Company’s total minimum rental commitments under noncancellable operating leases are approximately $389,000 of which $92,000, $86,000, $86,000, $86,000, $37,000 and $1,800 are payable in fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter, respectively.
The Company has contracts with doctors to manage various areas of the Company's hospital and other service agreements. Payments made under these agreements for the fiscal years ended August 31, 2015 and 2014 were $1,101,000 and $1,145,000, respectively. The Company’s minimum commitments under these contracts are approximately $1,074,000, all of which is payable in fiscal year 2016.
The Company has administrative support services agreements with outside organizations for administrative support services. Payments made related to these agreements for fiscal years 2015 and 2014 were $722,000 and $388,000, respectively. The Company has a total commitment of approximately $2,236,000, of which $652,000, $396,000, $264,000, $264,000, $264,000 and $396,000 are payable in fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter, respectively, related to these administrative support services agreements.
Total advertising expenses paid by the Company for the fiscal years 2015 and 2014 were approximately $477,000 and $471,000, respectively. The Company has agreements with outside organizations that offer marketing services in areas serviced by the Pasadena facility. The Company has a total commitment of approximately $221,000, of which $204,000 is payable in fiscal year 2016 and $17,000 in fiscal year 2017 related to these marketing agreements.
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The Company has purchased some equipment under capital leases, and has a total commitment to pay $43,000 under these leases, of which $32,000 is payable in fiscal year 2016, and $11,000 in 2017.
These commitments mentioned above total $19.2 million, of which $17.3 million is payable in fiscal year 2016, $510,000 in 2017, $350,000 in 2018, $350,000 in 2019, $301,000 in 2020 and $398,000 thereafter.
Risks and Uncertainties
The Company maintains various insurance policies that cover its Pasadena facility including occurrence medical malpractice coverage. In addition, all physicians granted privileges at the Pasadena facility are required to maintain medical malpractice insurance coverage. The Company also maintains general liability and property insurance coverage, including flood coverage. The Company does not currently maintain worker's compensation coverage in Texas. In regard to the Employee Health Insurance Plan, until April 30, 2014, the Company was self-insured with specific and aggregate re-insurance with stop-loss levels appropriate for the Company's group size. Effective May 1, 2014, the Company has taken coverage for its employees under a fully insured health plan.
We do not carry director and officer liability insurance. As permitted under Nevada law and pursuant to our governing documents and indemnification agreements with certain of our officers and directors, we indemnify our directors and officers against monetary damages, including advancing expenses, to the fullest extent permitted by Nevada law.
Ping S. Chu, James G. Gerace (both former members of our Board of Directors), and Eric G. Carter (former legal counsel) along with eleven other claimants instigated a series of lawsuits making claims against Ella Y.T.C. Chan (in her individual capacity and in her capacity as Independent Executrix of the Estate of Chiu M. Chan, Deceased, our former Chief Executive Officer and director), Eric K. Chan (our current Chief Executive Officer and director), and Dynacq Healthcare, Inc. All claims were settled in mediations and as part of the settlements Dynacq repurchased 530,616 shares of Dynacq common stock in August 2014, and 286,386 shares of Dynacq stock in April 2015. These buybacks represent all stock held by each of the claimants. Additionally, as part of this settlement, Dynacq settled claims made by Eric G. Carter for payment of attorney fees, and claims by a company controlled by Mr. Carter, for breach of contract. The Company recognized $2,047,652 of expense associated with these settlements during the fiscal year ended August 31, 2014. This amount is reported as other operating expenses in the consolidated statements of operations. A portion of the settlements were attributed to the repurchase of the Company’s common stock. This amount was supported by an independent appraisal as discussed in Note 6.
The Company is routinely involved in litigation and administrative proceedings that are incidental to its business. Specifically, all judicial review of unsatisfactory determinations of reimbursement amounts due us for our Texas facilities’ fees must be made in the district courts of Travis County, Texas in what can often be a lengthy procedure.
| 12. | Concentrations of Credit Risk and Fair Value of Financial Instruments |
The Company has financial instruments that are exposed to concentrations of credit risk and consist primarily of cash investments and trade accounts receivable. The Company routinely maintains cash and temporary cash investments at certain financial institutions in amounts substantially in excess of (a) Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation ("SIPC") insurance limits in the U.S. and (b) Hong Kong Deposit Protection Board (“HKDPB”) insurance limits in Hong Kong. At August 31, 2015, the Company had cash balances in excess of the FDIC and SIPC limits in the U.S. and HKDPB limits in Hong Kong of $13.9 million. Management believes that these financial institutions are of high quality and the risk of loss is minimal.
As is customary in the healthcare business, the Company has accounts receivable from various third-party payers. The Company does not request collateral from its customers and continually monitors its exposure for credit losses and maintains allowances for anticipated losses. Gross receivables from third-party payers are normally in excess of 90% of the total receivables at any point in time. The mix of gross receivables as at August 31, 2015 and 2014 are as follows:
46
| 2015 | 2014 | |||||||
| Workers' compensation | 4 | % | 2 | % | ||||
| Workers' compensation subject to Medical Dispute Resolution process | 79 | % | 80 | % | ||||
| Commercial | 8 | % | 11 | % | ||||
| Medicare / Government | 1 | % | 1 | % | ||||
| Self-pay | 5 | % | 4 | % | ||||
| Other | 3 | % | 2 | % | ||||
| 100 | % | 100 | % | |||||
We had three third-party payers (customers) representing 25%, 17% and 13% of the Company’s gross revenue for the fiscal year ended August 31, 2015. We had four third-party payers (customers) representing 18%, 12%, 10% and 10% of the Company’s gross revenue for the fiscal year ended August 31, 2014. We had one third-party payer (customer) who represented 18% of our gross receivables as of August 31, 2014. For the fiscal year ended August 31, 2015, approximately 84% of our gross revenues were generated from six surgeons. For the fiscal year ended August 31, 2014, approximately 84% of our gross revenues were generated from five surgeons.
13. Industry Segments and Geographic Information
The Industry Segment “U.S. Division” comprises of the Company’s Pasadena facility. The Company at the present time has the U.S. Division and the Corporate Division.
Certain previously reported financial information has been reclassified to conform to the current year’s presentation.
Corporate Division
The Company formed Sino Bond to hold and manage investments in Hong Kong. Sino Bond invests in corporate debt instruments and equity securities in Europe and Asia, including initial public offerings and pre-initial public offerings. The Company invests in various marketable securities. During the fiscal year ended August 31, 2015, one particular security was called on which the Company had a gain of approximately $2.1 million. As of August 31, 2015, the balance of these securities is valued at approximately $10.9 million. During the fiscal year ended August 31, 2014, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had a net gain of $161,864 in these securities. During the first quarter of the fiscal year 2014, the Company sold all of its trading securities and has not held any such securities since November 30, 2013.
The Corporate Division includes interest and other income related to its investments in securities, corporate personnel compensation expenses, and general and administrative expenses. Such expenses and income are not allocated to our operating division, as they relate to our general corporate activities.
We generally evaluate performance based on profit or loss from operations before income taxes and non-recurring charges and other criteria. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are no transfers between segments.
Summarized financial information concerning the business segments is as follows:
| Year Ended August 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenues from external customers | ||||||||
| Net patient service revenues | ||||||||
| U.S. Division | $ | 6,997,884 | $ | 10,218,309 | ||||
| Corporate | — | — | ||||||
| Consolidated | $ | 6,997,884 | $ | 10,218,309 | ||||
| Loss before income taxes | ||||||||
| U.S. Division | $ | (3,379,553 | ) | $ | (151,547 | ) | ||
| Corporate | (458,588 | ) | (3,641,420 | ) | ||||
| Consolidated | $ | (3,838,141 | ) | $ | (3,792,967 | ) | ||
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| August 31, | ||||||||
| 2015 | 2014 | |||||||
| Total Assets | ||||||||
| U.S. Division | $ | 16,085,709 | $ | 15,967,472 | ||||
| Corporate | 19,994,556 | 31,793,055 | ||||||
| Consolidated | $ | 36,080,265 | $ | 47,760,527 | ||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation to assess the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15(e). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of August 31, 2015, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, an evaluation of the effectiveness of our internal control over financial reporting was conducted based on the framework in Internal Controls – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation under the framework in Internal Controls – Integrated Framework issued by the COSO, our management concluded that, as of August 31, 2015, our internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended August 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control. The design of any systems of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
Our directors and/or executive officers and their ages as of November 23, 2015, are shown below.
| Name | Age | Position | ||
| Eric K. Chan | 37 | Director, Chief Executive Officer and President | ||
| Hemant Khemka | 50 | Chief Financial Officer |
Eric K. Chan has served as a Board member, Chief Executive Officer and President since January 2012. Dr. Chan is board certified in anesthesiology. He has been the sole owner of Redwood Health Corporation since March 2005, which furnishes physicians to provide in-house emergency medical coverage and recruits anesthesiologists and certified registered nurse anesthetists at hospitals, including the Company’s Pasadena facility. Dr. Chan has also been the sole owner of Anesthesia Associates of Houston Metroplex since August 2007, which provides anesthesiology services to hospitals, including the Company’s Pasadena facility. He was an Assistant Professor at Memorial Hermann Hospital, University of Texas at Houston from August 2007 to September 2008. Dr. Chan earned his M.B.A. in Health Organization Management and M.D. from Texas Tech University.
Hemant Khemka has served as Chief Financial Officer since April 2013, interim principal financial officer since August 2012, as Corporate Controller since July 2004 and was our assistant controller since April 2003. Mr. Khemka earned advanced accounting degrees from the University of Calcutta, a Masters degree in Business Administration and is a Certified Public Accountant in the state of Texas. Prior to his employment with Dynacq, Mr. Khemka had previous corporate and outside accounting experience with Ernst & Young LLP and El Paso Corporation.
Independence and Controlled Company Status
Mrs. Ella Chan, wife of our former Chairman and Chief Executive Officer, Mr. Chiu Chan, individually and as the sole trustee of Chiu M. Chan Family Trust, beneficially owns an aggregate of approximately 61.7% of our outstanding common stock. As the majority stockholder, she is able to control all matters requiring stockholder approval, including the election and removal of any directors and any merger, consolidation or sale of all or substantially all of our assets. Further, our governing documents provide that two-thirds constitutes a super-majority of our common stock. A super-majority has the ability to, among other things, remove members of our Board of Directors for cause or for no cause at all. Mrs. Chan together with her son, Eric K. Chan, our Chief Executive Officer, beneficially own 63.7% of our outstanding common stock. Accordingly, they would only need a smaller number of additional votes to achieve a super-majority. This concentration of ownership could have the effect of delaying, deferring or preventing a change of control, or impeding a merger or consolidation, takeover or other business combination or sale of all or substantially all of our assets. The interests of Ella Chan and/or Eric Chan may conflict with those of other stockholders. In the event that either elects to sell significant amounts of common stock in the future, such sales could depress the market price of our common stock, further increasing the volatility of our trading market.
The sole remaining member of our Board is Dr. Eric K. Chan, who also serves as our Chief Executive Officer and President. Our Board currently has five vacancies. We intend to seek qualified candidates to fill these vacancies, including some candidates that are deemed independent based on the independence standards of NASDAQ. There can be no assurance, however, that we will be able to fill any of these vacancies with new directors, independent or otherwise. In the interim, the sole remaining member of our Board will continue to fulfill the Board’s responsibilities.
Audit Committee and Audit Committee Financial Expert
The Company at present does not have an audit committee, however, for certain purposes of the rules and regulations of the SEC and in accordance with the Sarbanes-Oxley Act of 2002, the Company’s Board of Directors is deemed to be its audit committee and as such functions as an audit committee and performs some of the same functions as an audit committee including: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; and (3) engaging outside advisors. The Board of Directors has determined that its sole member, Dr. Eric Chan, is able to read and understand fundamental financial statements and has substantial business experience that results in that member's financial sophistication. Accordingly, the Board of Directors believes that its member has the sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have. The Board has not, however, determined that Dr. Chan should be deemed a financial expert. We anticipate seeking qualified candidates to fill the vacancies in the Board, including a financial expert. There can be no assurance, however, that we will be able to fill any of the Board vacancies with new directors, including a financial expert.
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Procedures for Contacting Directors
Shareholders who wish to communicate with the Board of Directors, or with any individual director, may send such communication in writing addressed to the Board of Directors, or to an individual director, at 4301 Vista Road, Pasadena, Texas 77504. All communications received from shareholders are sent directly to Board members.
Indemnification of our Directors and Officers against Certain Liabilities and Director and Officer Liability Insurance
As permitted under Nevada law and pursuant to our governing documents and indemnification agreements with certain of our officers and directors, we indemnify our directors and officers against monetary damages, including advancing expenses, to the fullest extent permitted by Nevada law.
We do not carry director and officer liability insurance.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own beneficially more than ten percent of our common stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based solely upon a review of Forms 3, 4 and 5 furnished to us during the fiscal year ended August 31, 2015, we believe that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements during the fiscal year ended August 31, 2015.
Code of Conduct
The Company has adopted a Code of Conduct that applies to all of its directors, officers and employees. The Code of Conduct is reasonably designed to deter wrongdoing and to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure in reports and documents filed with, or submitted to, the SEC and in other communications made by the Company, (iii) compliance with applicable governmental laws, rules and regulations, (iv) the prompt internal reporting of violations of the Code of Conduct to appropriate persons identified in the Code of Conduct, and (v) accountability for adherence to the Code of Conduct. The Code of Conduct is available on the Company’s website at www.dynacq.com. Amendments to the Code of Conduct and any grant of a waiver from a provision of the Code of Conduct requiring disclosure under applicable SEC rules will be disclosed on the Company’s website at www.dynacq.com.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officers, principal accounting officer or controller, and persons performing similar functions. The Code of Ethics is reasonably designed to help maintain the Company’s standards of business conduct and ensure compliance with legal requirements, specifically, but not limited to, Section 406 of the Sarbanes-Oxley Act of 2002 and SEC rules promulgated thereunder. The Code is also designed to deter wrongdoing and promote ethical conduct, and full, fair, accurate, timely, and understandable disclosure of financial information in the periodic reports of the Company. The Code of Ethics is available on the Company’s website at www.dynacq.com. Amendments to the Code of Ethics and any grant of a waiver from a provision of the Code of Ethics requiring disclosure under applicable SEC rules will be disclosed on the Company’s website at www.dynacq.com.
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Item 11. Executive Compensation.
Named Executive Officers
The Company’s executive officers are Eric K. Chan, Chief Executive Officer, President and sole Board member, and Hemant Khemka, Chief Financial Officer. Throughout this report, these individuals are sometimes referred to collectively as the “Named Executive Officers.”
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes the compensation of the Named Executive Officers, including former executive officers, for the past two fiscal years:
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Option | All Other | Total ($) | ||||||||||||||||||
| Eric K. Chan, | 2015 | 350,000 | — | 33,242 | 7,368 | 390,610 | ||||||||||||||||||
| Chief Executive Officer | 2014 | 350,000 | — | 33,242 | 6,572 | 389,814 | ||||||||||||||||||
| Hemant Khemka, | 2015 | 185,000 | — | 16,228 | 5,486 | 206,714 | ||||||||||||||||||
| Chief Financial Officer | 2014 | 185,000 | — | 16,228 | 5,723 | 206,951 | ||||||||||||||||||
| (1) | Represents the dollar amount recognized for financial statement reporting purposes for the fiscal years ended August 31, 2015 and 2014, in accordance with ASC Topic 718. These stock options were awarded to the Named Executive Officers in fiscal years 2007, 2011 and 2012. |
| (2) | Represents amounts paid by the Company for life insurance premium, employer’s contribution to the Company’s 401(k) plan and club membership fees. |
The Company provides competitive base salaries and bonuses to its executives. The Company does not target any specific proportion of total compensation in setting base salary and bonus compensation.
Grants of Plan Based Awards
There were no equity or non-equity incentive plan awards to the Named Executive Officers in fiscal year 2015.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information regarding equity-based awards held by the Named Executive Officers as of August 31, 2015.
| Option Awards | ||||||||||||||||||
| Number
of Securities Underlying Unexercised Options |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned |
Option Exercise |
Option Expiration | |||||||||||||||
| Name | Exercisable | Unexercisable | Options | Price | Date | |||||||||||||
| Eric K. Chan | 187,500 | 62,500 | (1) | — | $ | 1.10 | 01/12/22 | |||||||||||
| Hemant Khemka | 98,500 | — | — | $ | 1.86 | 07/07/21 | ||||||||||||
| (1) | These stock options will vest on January 12, 2016. |
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Option Exercises
No stock options were exercised by any of the Named Executive Officers in the fiscal year ended August 31, 2015.
Potential Payments upon Termination or Change-in-Control
The Named Executive Officers do not have employment agreements with the Company and both are employed on an “at will” basis. The Company does not have arrangements with any of its Named Executive Officers providing for additional benefits or payments in connection with a termination of employment, change in job responsibility or change-in-control. Grants of stock options to all employees eligible to receive such grants under the Company’s 2000 Incentive Plan vest immediately in the event of a change in control; therefore, no separate disclosure is presented herein with respect to the acceleration of stock options held by the Named Executive Officers upon a change of control under the terms of this stock option plan. Grants of stock options to all employees eligible to receive grants under the Company’s Year 2011 Stock Incentive Plan do not have a provision for immediate vesting in the event of a change in control.
Risk Assessment of the Company’s Compensation Policies
The Company’s compensation programs are discretionary, balanced and focused on the long term. Goals and objectives of the Company’s compensation programs reflect a balanced mix of quantitative and qualitative performance measures to avoid excessive weight on a single performance measure. The Company’s approach to compensation practices and policies applicable to employees throughout the Company is consistent with that followed for its executives and, accordingly, the Company believes that its compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company.
Pension Benefits
There were no pension benefit plans in effect in fiscal year 2015.
Compensation of Directors
The Company did not have any non-employee directors during the fiscal year ended August 31, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of November 23, 2015, information with respect to shares beneficially owned by: (a) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock, (b) each of our directors and the named executive officers named in the Summary Compensation Table above, and (c) all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, some shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option) within sixty days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investing power with respect to all shares of common stock shown as beneficially owned by them.
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| Beneficial Owner(1) | Number Of Shares | Percent Of Class(2) | ||||||
| Ella Y.T.C. Chan(3) | 4,199,160 | 30.87 | % | |||||
| Chiu M. Chan Family Trust(3) | 4,199,160 | 30.87 | % | |||||
| Eric K. Chan | 387,311 | (4) | 2.81 | % | ||||
| Hemant Khemka | 98,500 | (5) | * | |||||
| All directors and executive officers as a group (2 persons) | 485,811 | (6) | 3.50 | % | ||||
| (1) | The address for each named person is 4301 Vista Road, Pasadena, Texas 77504. |
| (2) | Based on 13,601,624 shares outstanding as of November 23, 2015. |
| (3) | Since Ella Y.T.C. Chan has voting power with respect to 61.7% of the Company’s outstanding common stock, either as an individual or as the sole trustee of Chiu M. Chan Family Trust, she controls the outcome of any matter requiring the vote of a majority of the outstanding shares to approve. |
| (4) | Includes 187,500 shares underlying options, which are exercisable in accordance with Rule 13d-3 under the Exchange Act. |
| (5) | Includes 98,500 shares underlying options, which are exercisable in accordance with Rule 13d-3 under the Exchange Act. |
| (6) | Includes 286,000 shares underlying options, which are exercisable in accordance with Rule 13d-3 under the Exchange Act. |
| * | Indicates ownership of less than 1%. |
Securities Authorized For Issuance under Equity Compensation Plans
The following table provides information as of November 23, 2015, with respect to the Company’s equity compensation plans under which equity securities are authorized for issuance.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance (excluding securities reflected in first column) | |||||||||
| Plans approved by shareholders | 771,654 | $ | 1.61 | 14,750,000 | ||||||||
| Plans not approved by shareholders | — | — | — | |||||||||
| Total | 771,654 | $ | 1.61 | 14,750,000 | ||||||||
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Four immediate family members (two uncles and two aunts) of the Company’s Chief Executive Officer, Dr. Eric Chan, received an aggregate of $312,485 and $312,085 in compensation as employees of the Company or its subsidiaries in fiscal years 2015 and 2014, respectively.
The Company has retained Redwood Health Corporation (“Redwood”), to furnish physicians to provide in-house emergency medical coverage for its Pasadena facility at an hourly rate of $75. The Company’s Chief Executive Officer is a physician and the sole owner of Redwood. The Company paid $657,000 and $515,025 for emergency room physician services to Redwood in fiscal years 2015 and 2014, respectively.
During the fiscal year 2009, the Company retained Anesthesia Associates of Houston Metroplex to provide exclusive, continuous and uninterrupted anesthesiology services, including physicians and CRNAs, to the Pasadena facility for a monthly compensation of $5,000. The Company’s Chief Executive Officer is a physician and an affiliate of Anesthesia Associates of Houston Metroplex. The Company paid $60,000 for anesthesiology services to said organization in each of the fiscal years 2015 and 2014. During the fiscal year 2009, the Company also retained Redwood to locate and recruit additional skilled anesthesiologists and CRNAs for its Pasadena facility for a monthly compensation of $20,000. The Company paid $240,000 for said recruitment services to Redwood in each of the fiscal years 2015 and 2014. The Company entered into these two agreements in order to replace the previous anesthesiology group, whose contract terminated at the end of fiscal year 2009. The compensation which was being paid to the previous group was substantially the same as that being paid under the new contracts.
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The Company had purchased artifacts as inventory for re-sale in China during fiscal years 2010 and 2011. The purchase amount was paid by Mr. Chiu Chan, the Company’s former Chief Executive Officer. The amount payable to his estate of $229,317 as of August 31, 2014, is included in Accrued Liabilities in the Consolidated Balance Sheet as of August 31, 2014, and has been paid in June 2015.
Director Independence
The sole remaining member of our Board is Dr. Eric K. Chan, who also serves as our Chief Executive Officer and President, and is not independent. Our Board currently has five vacancies. We intend to seek qualified candidates to fill these vacancies, including some candidates that are deemed independent based on the independence standards of NASDAQ. There can be no assurance, however, that we will be able to fill any of these vacancies with new directors, independent or otherwise. In the interim, the sole remaining member of our Board will continue to fulfill the Board’s responsibilities.
Item 14. Principal Accounting Fees and Services.
General
The following table presents fees for professional services rendered by Briggs & Veselka Co. (“B&V”), independent registered public accounting firm for the audit of the Company’s annual financial statements, fees for audit-related services, tax services and all other services.
| 2015 | 2014 | |||||||
| Audit Fees | $ | 195,410 | $ | 137,978 | ||||
| Audit-Related Fees | 14,744 | 14,000 | ||||||
| Tax Fees | 46,921 | 68,138 | ||||||
| All Other Fees | — | — | ||||||
Audit Fees
Audit Fees represents the aggregate fees billed for professional services rendered by B&V for the audit of our annual financial statements and review of financial statements included in our quarterly reports or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-Related Fees
Audit-Related Fees represents the aggregate fees billed for professional services rendered by B&V for the audit of the Company’s 401(k) plan.
Tax Fees
Tax Fees represents the aggregate fees billed for professional services rendered by B&V for income tax return preparation and tax compliance.
All Other Fees
All Other Fees represents the aggregate fees billed for professional services other than the services reported above.
Audit Committee Pre-Approval Policies and Procedures
All audit and non-audit services performed by the independent certified public accountants are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the auditors’ independence. The Audit Committee’s charter provides that the Audit Committee may delegate to any of its members the authority to pre-approve any services performed by the independent certified public accountants, provided that such approval is presented to the Audit Committee at its next scheduled meeting. All of the audit-related, tax and all other services described above were pre-approved by the full Audit Committee, before the removal of its members from the Board in October 2012.
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Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements: See Index to Consolidated Financial Statements under Item 8 on Page 25 of this Report.
(a)(2) Financial Statement Schedule: Not required.
(b) Exhibits. The following exhibits are to be filed as part of the annual report:
| EXHIBIT NO. | IDENTIFICATION OF EXHIBIT | |
| Exhibit 3.1 | Certificate of Incorporation incorporated by reference to Exhibit 3.1 to the Form 10-K filed November 13, 2007. | |
| Exhibit 3.2 | Bylaws incorporated by reference to Exhibit 3.2 to the Form 10-K filed November 13, 2007. | |
| Exhibit 3.3 | Amendment to Bylaws incorporated by reference to Exhibit 3.1 to the Form 8-K filed November 19, 2015. | |
| +Exhibit 10.1 | The Company's Year 2000 Incentive Plan adopted on August 29, 2000, and incorporated by reference as Appendix B from the Company's Definitive Proxy Statement on Schedule 14A filed August 9, 2000. | |
| +Exhibit 10.2 | The Company's Year 2011 Stock Incentive Plan adopted on September 2, 2011, and incorporated by reference as Exhibit A from the Company's Definitive Information Statement on Schedule 14C filed August 11, 2011. | |
| Exhibit 10.3 | Form of Indemnification Agreement with various officers and directors of the Company, incorporated by reference to Exhibit 10.11 to the Form 10-K for the fiscal year ended August 31, 2004. | |
| Exhibit 10.4 | Commercial Contract of Sale dated March 7, 2013 for the sale of the Garland facility, incorporated by reference to Exhibit 10.1 to the Form 8-K/A filed March 15, 2013. | |
| Exhibit 14.1 | Code of Ethics for Principal Executive and Senior Financial Officers, incorporated by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2003. | |
| Exhibit 21.1 | Listing of subsidiaries. | |
| Exhibit 23.1 | Consent of Briggs & Veselka Co. | |
| Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Exhibit 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Exhibit 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| Exhibit 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| + | Management contract or compensatory plan or arrangement. |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
55
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dynacq Healthcare, Inc. | ||
| Date: November 30, 2015 | By: | /s/ Eric K. Chan |
| Eric K. Chan, Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title |
Date |
| /s/ Eric K. Chan | Director, CEO and President | November 30, 2015 |
| Eric K. Chan | ||
| (Principal Executive Officer) | ||
| /s/ Hemant Khemka | Chief Financial Officer | November 30, 2015 |
| Hemant Khemka | ||
| (Principal Financial and Accounting Officer) |
|
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EXHIBIT INDEX
| EXHIBIT NO. | IDENTIFICATION OF EXHIBIT | |
| Exhibit 3.1 | Certificate of Incorporation incorporated by reference to Exhibit 3.1 to the Form 10-K filed November 13, 2007. | |
| Exhibit 3.2 | Bylaws incorporated by reference to Exhibit 3.2 to the Form 10-K filed November 13, 2007. | |
| Exhibit 3.3 | Amendment to Bylaws incorporated by reference to Exhibit 3.1 to the Form 8-K filed November 19, 2015. | |
| +Exhibit 10.1 | The Company's Year 2000 Incentive Plan adopted on August 29, 2000, and incorporated by reference as Appendix B from the Company's Definitive Proxy Statement on Schedule 14A filed August 9, 2000. | |
| +Exhibit 10.2 | The Company's Year 2011 Stock Incentive Plan adopted on September 2, 2011, and incorporated by reference as Exhibit A from the Company's Definitive Information Statement on Schedule 14C filed August 11, 2011. | |
| Exhibit 10.3 | Form of Indemnification Agreement with various officers and directors of the Company, incorporated by reference to Exhibit 10.11 to the Form 10-K for the fiscal year ended August 31, 2004. | |
| Exhibit 10.4 | Commercial Contract of Sale dated March 7, 2013 for the sale of the Garland facility, incorporated by reference to Exhibit 10.1 to the Form 8-K/A filed March 15, 2013. | |
| Exhibit 14.1 | Code of Ethics for Principal Executive and Senior Financial Officers, incorporated by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2003. | |
| Exhibit 21.1 | Listing of subsidiaries. | |
| Exhibit 23.1 | Consent of Briggs & Veselka Co. | |
| Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Exhibit 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Exhibit 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| Exhibit 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| + | Management contract or compensatory plan or arrangement. |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Exhibit 21.1
Subsidiaries of the Registrant
The Registrant has the following subsidiaries which, except as indicated, do business under their legal names:
| NAME | PLACE OF INCORPORATION/ORGANIZATION | |
| Ambulatory Infusion Therapy Specialist, Inc. | Texas | |
| Doctors Practice Management, Inc. | Texas | |
| Sino Bond Inc. Limited | Hong Kong | |
| Surgery Specialty Clinicians, Inc. | Texas | |
| Vista Community Medical Center, LLP d/b/a Surgery Specialty Hospitals of America – Southeast Houston Campus | Texas | |
| Vista Healthcare, Inc. | Texas | |
| Vista Hospital of Dallas, LLP | Texas | |
| Vista Land and Equipment, LLC | Texas |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in Registration Statements No. 333-72756 and 333-176740 of our report dated November 30, 2015 relating to the consolidated financial statements of Dynacq Healthcare, Inc. appearing in this Annual Report on Form 10-K for the year ended August 31, 2015.
| /s/ Briggs & Veselka Co. |
| Briggs & Veselka Co. |
| Houston, Texas |
| November 30, 2015 |
EXHIBIT 31.1
CERTIFICATION
I, Eric K. Chan, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Dynacq Healthcare, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 30, 2015 | /s/ Eric K. Chan | |
| Name: | Eric K. Chan | |
| Title: | President and Chief Executive Officer | |
EXHIBIT 31.2
CERTIFICATION
I, Hemant Khemka, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Dynacq Healthcare, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 30, 2015 | /s/ Hemant Khemka | |
| Name: | Hemant Khemka | |
| Title: | Chief Financial Officer | |
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the periodic report of Dynacq Healthcare, Inc. (the “Company”) on Form 10-K for the year ended August 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric K. Chan, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: November 30, 2015 | /s/ Eric K. Chan |
| Eric K. Chan | |
| President and Chief Executive Officer | |
| Dynacq Healthcare, Inc. |
Exhibit 32.2
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the periodic report of Dynacq Healthcare, Inc. (the “Company”) on Form 10-K for the year ended August 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Hemant Khemka, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: November 30, 2015 | /s/ Hemant Khemka |
| Hemant Khemka | |
| Chief Financial Officer | |
| Dynacq Healthcare, Inc. |
Net Loss Per Common Share (Details Textual) - shares |
12 Months Ended | |
|---|---|---|
Aug. 31, 2015 |
Aug. 31, 2014 |
|
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Stock options with exercise prices exceeding current market prices | 771,654 | 995,350 |
Related Party Transactions (Details Textual) - USD ($) |
12 Months Ended | |||
|---|---|---|---|---|
Aug. 31, 2015 |
Aug. 31, 2014 |
Aug. 31, 2013 |
Aug. 31, 2009 |
|
| Related Party Transaction [Line Items] | ||||
| Related Party Transaction Hourly Rate For Physicians | $ 75 | |||
| RelatedParty Transaction Payment Made For Emergency Room Physician Services | $ 657,000 | $ 515,025 | ||
| Accrued Liabilities Current | 16,235,138 | 18,512,986 | ||
| Former Chief Executive Officer [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Accrued Liabilities Current | 229,317 | |||
| Anesthesia Associates [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Related Party Transaction Payment Made To Related Party | 60,000 | 60,000 | ||
| Related Party Transaction, Expenses from Transactions with Related Party | $ 5,000 | |||
| Redwood [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Payment For Recruitment Services | 240,000 | $ 240,000 | ||
| Related Party Transaction, Expenses from Transactions with Related Party | $ 20,000 | |||