Form 10-Q for quarterly period ended May 31, 2011

DYNACQ HEALTHCARE, INC.

DR. GARRY CRAIGHEAD

/s/ Chiu M. Chan

/s/ Dr. Garry Craighead

Chiu M. Chan

Dr. Garry Craighead

Chief Executive Officer

Chief Development Officer

0001193125-11-187595.txt : 20110713 0001193125-11-187595.hdr.sgml : 20110713 20110713161541 ACCESSION NUMBER: 0001193125-11-187595 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20110531 FILED AS OF DATE: 20110713 DATE AS OF CHANGE: 20110713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNACQ HEALTHCARE INC CENTRAL INDEX KEY: 0000890908 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 760375477 STATE OF INCORPORATION: NV FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21574 FILM NUMBER: 11965997 BUSINESS ADDRESS: STREET 1: 10304 INTERSTATE 10 EAST STREET 2: SUITE 369 CITY: HOUSTON STATE: TX ZIP: 77029 BUSINESS PHONE: 7136736639 MAIL ADDRESS: STREET 1: 10304 I-10 EAST STREET 2: SUITE 369 CITY: HOUSTON STATE: TX ZIP: 77029 FORMER COMPANY: FORMER CONFORMED NAME: DYNACQ INTERNATIONAL INC DATE OF NAME CHANGE: 19960126 10-Q 1 d10q.htm FORM 10-Q FOR QUARTERLY PERIOD ENDED MAY 31, 2011 Form 10-Q for quarterly period ended May 31, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2011

¨	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.)

10304 Interstate 10 East, Suite 369
Houston, Texas		77029
(Address of principal executive offices)		(Zip Code)

(713) 378-2000

(Registrant’s telephone number, including area code)

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 ¨ No ¨

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 Exchange Act). Yes ¨ No x

As of July 11, 2011, the number of shares outstanding of the registrant’s common stock, par value $.001 per share, was 14,426,960.

Table of Contents


		Page
Report of Independent Registered Public Accounting Firm.			3

PART I–FINANCIAL INFORMATION			4

Item 1.	Financial Statements.		4

	Consolidated Balance Sheets as of May 31, 2011 and August 31, 2010.		4

	Consolidated Statements of Operations for the three and nine months ended May 31, 2011 and 2010.		6

	Consolidated Statements of Cash Flows for the nine months ended May 31, 2011 and 2010.		7

	Notes to Consolidated Financial Statements.		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		35

Item 4.	Controls and Procedures.		35

PART II–OTHER INFORMATION			36

Item 1.	Legal Proceedings.		36

Item 1A.	Risk Factors.		36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		36

Item 3.	Defaults Upon Senior Securities.		36

Item 4.	(Removed and Reserved).		36

Item 5.	Other Information.		36

Item 6.	Exhibits.		37

Signatures			38

Index of Exhibits			39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To:	The Stockholders and Board of Directors

Dynacq Healthcare, Inc.

Houston, Texas

We have reviewed the accompanying consolidated balance sheet of Dynacq Healthcare, Inc., as of May 31, 2011, and the related consolidated statements of operations and cash flows for the three-month and nine-month periods ended May 31, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with United States of America generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Dynacq Healthcare, Inc., as of August 31, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated November 19, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of August 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Killman, Murrell & Company, P.C.

Killman, Murrell & Company, P.C.

Houston, Texas

July 13, 2011

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

Dynacq Healthcare, Inc.

Consolidated Balance Sheets


	May 31, 2011		August 31, 2010
	(Reviewed)		(Audited)
Assets
Current assets:
Cash and cash equivalents	$	25,303,987	$	27,665,945
Accounts receivable, net of contractual allowances of approximately $187,838,000 and $211,401,000 at May 31, 2011 and August 31, 2010, respectively		1,027,278		2,299,062
Inventories		130,169		165,018
Trading securities		1,295,519		—
Interest receivable		377,416		354,461
Prepaid expenses		338,934		485,679
Income tax receivable		2,363,724		4,026,783
Assets of discontinued operations		15,177,608		15,544,469
Deferred tax assets		600,534		616,474

Total current assets		46,615,169		51,157,891
Investments available-for-sale		24,991,332		21,923,992
Investment in real estate, net		1,953,953		1,992,687
Property and equipment, net		264,790		359,977
Income tax receivable		868,249		868,249
Other assets		248,013		260,737

Total assets	$	74,941,506	$	76,563,533

See accompanying notes.

Dynacq Healthcare, Inc.

Consolidated Balance Sheets (continued)


	May 31, 2011		August 31, 2010
	(Reviewed)		(Audited)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,922,916	$	2,847,297
Accrued liabilities		16,578,667		4,424,660
Current portion of notes payable		97,262		62,289
Liabilities of discontinued operations		917,907		1,024,814
Current taxes payable		—		3,000

Total current liabilities		20,516,752		8,362,060
Non-current liabilities:
Long-term portion of notes payable		1,118,687		1,157,150
Deferred tax liabilities		746,755		3,961,237

Total liabilities		22,382,194		13,480,447

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, 14,176,960 shares issued at May 31, 2011 and August 31, 2010		14,177		14,177
Additional paid-in capital		9,122,244		9,039,624
Accumulated other comprehensive income		10,930,132		8,673,575
Retained earnings		32,417,458		45,276,115

Total Dynacq stockholders’ equity		52,484,011		63,003,491

Non-controlling interest		75,301		79,595

Total equity		52,559,312		63,083,086

Total liabilities and equity	$	74,941,506	$	76,563,533

See accompanying notes.

Dynacq Healthcare, Inc.

Consolidated Statements of Operations

(Reviewed)


	Three months ended May 31,						Nine months ended May 31,
	2011			2010			2011			2010
Net patient service revenue	$	—		$	—		$	—		$	—

Costs and expenses:
Compensation and benefits		700,309			1,021,601			2,105,894			3,010,377
Other operating expenses		944,306			725,129			2,847,408			3,078,010
Depreciation and amortization		42,509			49,142			143,383			123,543

Total costs and expenses		1,687,124			1,795,872			5,096,685			6,211,930

Operating loss		(1,687,124	)		(1,795,872	)		(5,096,685	)		(6,211,930	)

Other income (expense):
Rent and other income (expense)		310,753			(248,993	)		1,260,011			(178,768	)
Interest income		426,238			542,782			1,265,488			1,409,285
Interest expense		(3,591	)		(1,759	)		(11,445	)		(6,172	)

Total other income, net		733,400			292,030			2,514,054			1,224,345

Loss before income taxes from continuing operations		(953,724	)		(1,503,842	)		(2,582,631	)		(4,987,585	)
Benefit for income taxes		305,708			450,469			846,671			1,535,311

Loss from continuing operations		(648,016	)		(1,053,373	)		(1,735,960	)		(3,452,274	)
Discontinued operations, net of income taxes		(9,378,171	)		(1,335,469	)		(11,005,414	)		(3,197,158	)
Loss on disposal of discontinued operations, net of income taxes		—			—			(121,577	)		—

Net loss		(10,026,187	)		(2,388,842	)		(12,862,951	)		(6,649,432	)
Less: Net loss attributable to noncontrolling interest		1,532			67,202			4,294			156,709

Net loss attributable to Dynacq Healthcare, Inc.	$	(10,024,655	)	$	(2,321,640	)	$	(12,858,657	)	$	(6,492,723	)

Basic and diluted loss per common share:
Loss from continuing operations attributable to Dynacq Healthcare, Inc.	$	(0.05	)	$	(0.07	)	$	(0.12	)	$	(0.22	)
Discontinued operations, net of income taxes		(0.66	)		(0.09	)		(0.78	)		(0.22	)
Loss on disposal of discontinued operations, net of income taxes		—			—			(0.01	)		—

Net loss attributable to Dynacq Healthcare, Inc.	$	(0.71	)	$	(0.16	)	$	(0.91	)	$	(0.44	)

Basic and diluted average common shares outstanding		14,176,960			14,196,141			14,176,960			14,731,232

Amounts attributable to Dynacq Healthcare, Inc.:
Loss from continuing operations	$	(646,484	)	$	(986,171	)	$	(1,731,666	)	$	(3,295,565	)
Discontinued operations, net of income taxes		(9,378,171	)		(1,335,469	)		(11,005,414	)		(3,197,158	)
Loss on disposal of discontinued operations, net of income taxes		—			—			(121,577	)		—

Net loss attributable to Dynacq Healthcare, Inc.	$	(10,024,655	)	$	(2,321,640	)	$	(12,858,657	)	$	(6,492,723	)

See accompanying notes.

Dynacq Healthcare, Inc.

Consolidated Statements of Cash Flows

(Reviewed)


	Nine months ended May 31,
	2011			2010
Cash flows from operating activities
Net loss	$	(12,858,657	)	$	(6,492,723	)
Less loss from discontinued operations, net of income taxes		(11,126,991	)		(3,197,158	)

Net loss before discontinued operations		(1,731,666	)		(3,295,565	)
Adjustments to reconcile net loss before discontinued operations to net cash used in operating activities:
Depreciation and amortization		143,383			123,543
Gain on sale of trading securities		(33,504	)		(193,291	)
Deferred income taxes		59,151			6,573
Noncontrolling interest		(4,294	)		(156,709	)
Charge for stock options to employees		82,620			338,637
Foreign currency exchange (gains) losses		(243,389	)		340,096
Changes in operating assets and liabilities:
Accounts receivable		1,271,784			5,831,508
Interest receivable		(22,955	)		(171,337	)
Inventories		42,098			—
Prepaid expenses		147,727			(4,696	)
Income taxes receivable		1,663,059			(3,232,024	)
Other assets		12,721			(12,845	)
Accounts payable		361,207			(263,311	)
Accrued liabilities		(937,424	)		(1,058,384	)
Income taxes payable		(3,000	)		(125,420	)

Cash provided by (used in) continuing activities		807,518			(1,873,225	)
Cash used in discontinued activities		(2,370,158	)		(2,374,213	)

Net cash used in operating activities		(1,562,640	)		(4,247,438	)


Cash flows from investing activities
Purchase of trading securities		(5,330,795	)		(1,000,928	)
Sales proceeds of trading securities		4,064,743			1,194,166
Purchase of real estate		—			(2,014,207	)
Purchase of equipment		—			(55,512	)

Cash used in continuing activities		(1,266,052	)		(1,876,481	)
Cash used in discontinued activities		(109,183	)		(346,545	)

Net cash used in investing activities		(1,375,235	)		(2,223,026	)


Cash flows from financing activities
Proceeds from notes payable		65,000			1,245,775
Principal payments on notes payable		(68,490	)		(261,815	)
Contributions from, and distributions to, noncontrolling interest, net		—			32,500
Treasury stock purchase		—			(3,809,174	)
Proceeds from exercise of stock options		—			89,688

Cash used in continuing activities		(3,490	)		(2,703,026	)
Cash used in discontinued activities		(99,681	)		(62,537	)

Net cash used in financing activities		(103,171	)		(2,765,563	)

Effect of exchange rate changes on cash		679,088			17,400

Net decrease in cash and cash equivalents		(2,361,958	)		(9,218,627	)
Cash at beginning of period		27,665,945			39,112,965

Cash at end of period	$	25,303,987		$	29,894,338

Continued.

Dynacq Healthcare, Inc.

Consolidated Statements of Cash Flows (continued)

(Reviewed)


	Nine months ended May 31,
	2011			2010
Supplemental cash flow disclosures
Cash paid during the period for:
Interest	$	32,974		$	30,062

Income taxes	$	—		$	406,153

Non cash investing and financing activities:
Investments available-for-sale	$	2,819,914		$	2,612,158
Accumulated other comprehensive income		(1,832,944	)		(1,699,629	)
Deferred tax liabilities		(986,970	)		(912,529	)
Equipment from capital lease (discontinued operations)		34,592			—
Capital lease obligation (discontinued operations)		(34,592	)		—
Common stock		—			(1,674	)
Additional paid-in capital		—			(6,236,965	)
Treasury stock		—			6,238,639

See accompanying notes.

Dynacq Healthcare, Inc.

Notes to Consolidated Financial Statements

May 31, 2011

(reviewed)

General

Dynacq Healthcare, Inc., a Nevada corporation (the “Company”), is a holding company that through its subsidiaries in China and Hong Kong (1) provided healthcare management services to a hospital in China until February 28, 2011; (2) invests in debt and equity securities, including short-term investments in initial public offerings and pre-initial public offerings; and (3) invests in artifacts for resale (which the Company has recently decided not to pursue). The Company through its United States subsidiaries owns and operates two general acute care hospitals in Pasadena and Garland, Texas. However, the Company has approved a plan to sell these facilities, and accordingly this business is classified as “Discontinued Operations” (see Discontinued Operations below). We are currently composed of two divisions: China and Corporate.

Basis of Presentation

The accompanying reviewed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal and recurring nature. 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 includes advertising and marketing expenses, were approximately $1.3 million and $1.4 million for the quarter ended May 31, 2011 and 2010, respectively, and $3.9 million and $5.0 million for the nine months ended May 31, 2011 and 2010, respectively. These reviewed financial statements should be read in conjunction with the audited financial statements at August 31, 2010. Operating results for the three and nine months ended May 31, 2011 are not necessarily indicative of the results that may be expected for the year ending August 31, 2011.

Certain previously reported financial information has been reclassified to conform to the current year period’s presentation. The impact of such reclassification was not significant to the prior year period’s overall presentation, except for presenting the two U.S. owned hospitals and the management of the Second People’s Hospital in China as discontinued operations.

Reorganization of Segments

The Industry Segment “U.S. Division” the Company had in prior years has been classified as discontinued operations in the consolidated financial statements, along with the corporate overhead costs associated with the U.S. Division. The Company at the present time has only the China Division and the Corporate Division.

Subsequent Event

On July 7, 2011 the Company, acting through its wholly owned subsidiary, Doctor’s Practice Management, Inc. (“DPM”), entered into a definitive Common Stock Purchase Agreement to acquire minority membership interests in CCM&D Consulting, L.L.C. (“CCM&D”) and GreenTree Administrators, L.L.C. (“GreenTree”). Additionally, DPM entered into a Management and Consulting Agreement with CCM&D for the establishment and operation of a series of medical clinics in the southern United States area. The principal of CCM&D, a clinic management company, and GreenTree, a third party administrator contracted by self-funded employees’ health care programs sponsored by employers, is Dr. Garry Craighead. CCM&D currently operates four clinics in Texas under the name Union Treatment Centers. The Company acquired a 15% and 40% membership interest in CCM&D and GreenTree, respectively. The Company purchased said interests with 125,000 shares of Dynacq Healthcare, Inc. common stock restricted pursuant to SEC Rule 144 as set forth in the Common Stock Purchase Agreement with CCM&D and GreenTree.

Pursuant to the Management and Consulting Agreement with CCM&D, DPM will furnish $250,000 in startup capital for each of a total of ten clinics during the next twelve months. The location and operating budget for each clinic will be subject to prior approval by DPM. Each clinic will be owned or leased by DPM, will be managed by CCM&D, and will bear the name Union Treatment Centers. CCM&D’s management fee will be 40% of the aggregate profits of the clinics, if any. The billing and collections for the clinics will be performed by CCM&D under the supervision of DPM. The Management and Consulting Agreement contains an initial term of one year, and is subject to renewal and to early termination.

Additionally, Dr. Garry Craighead became the Company’s Chief Development Officer upon execution of an Employment Agreement which granted Dr. Craighead an additional 125,000 shares of Dynacq common stock restricted pursuant to SEC Rule 144 as additional compensation. Further, under said Employment Agreement the Company granted Dr. Craighead an incentive stock option to purchase 1,500,000 shares of common stock of the Company pursuant to the Company’s Year 2000 Stock Incentive Plan, and the Company will pay Dr. Craighead an annual salary of $200,000. It will further grant Dr. Craighead an incentive stock option to purchase an additional 3,000,000 shares of common stock of the Company, upon shareholder approval. Both the Year 2011 Stock Incentive Plan and the grant of the incentive stock option to purchase an additional 3,000,000 shares have been approved by the Board of Directors and the Compensation Committee, but are subject to approval by the shareholders. The entire 4,500,000 stock option grants are performance awards attributable to his efforts. Specifically, 15,000 shares will vest based on the employee’s obtainment of each $1,000,000 of net collections for the Company, up to the maximum of 4,500,000 shares over five years.

The intention of the parties in entering into these transactions is to create an integrated healthcare system to provide efficient and cost-effective patient care, in accordance with the concept of an Accountable Care Organization.

Subsequent to the quarter ended May 31, 2011, on July 7, 2011, the Compensation Committee granted an aggregate of 1.4 million stock options with an exercise price of $1.86 to all full time employees with a minimum of one year of employment with the Company. These stock options will vest in annual installments of 25 percent beginning on the first anniversary date.

Cash and Cash Equivalents

The Company considers all highly liquid investments 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 has invested in various bonds. These investments are classified as available-for-sale securities, and are carried at fair value as of May 31, 2011, based on the quoted market prices as of that date. These investments are subject to default risk. The Company intends to hold these for a minimum period of an additional 12 months. Unrealized gains in the fair value are reported in accumulated other comprehensive income, net of related income tax effect. The Company 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 Company also invests in initial public offerings of equity securities on the Hong Kong Stock Exchange. These investments are classified as trading securities, and are carried at fair value as of May 31, 2011. These investments are subject to fluctuations in the market price. During the nine months ended May 31, 2011, the Company had a net gain of $33,504 in trading of these securities. This includes a loss of $116,108 due to fair valuation of trading securities held as of May 31, 2011, based on the quoted market price as of that date.

Investment in Real Estate and Notes Payable

In March 2010, the Company purchased an apartment in Hong Kong as an investment for $2,014,207. This apartment was used as a security to obtain an 18-year mortgage loan of $1,245,775 from a financial institution, with a variable interest rate at the lower of 3-month Hang Seng Interbank Offered Rates plus 0.7% or 2.9% below the Hong Kong Dollar best lending rate quoted by the financial institution. The effective interest rate at May 31, 2011 was 0.96%. The Company has paid down $47,657 during the nine months ended May 31, 2011 and the current and

long-term portions of the note payable as of May 31, 2011 are $64,447 and $1,107,336, respectively. Depreciation expense associated with the apartment was $12,912 and $38,735 for the three month and nine month periods ended May 31, 2011.

In September 2010, the Company borrowed $65,000 as note payable from a financial institution at an interest rate of 6%. This note payable is to be repaid in 24 monthly installments and is secured by specific equipment purchased at our Pasadena facility. The Company has paid down $20,834 during the nine months ended May 31, 2011, and the current and long-term portions of the note payable as of May 31, 2011 are $32,815 and $11,351, respectively.

Inventories

Inventories, consisting of artifacts, are stated at the lower of cost or market, with cost determined by use of the average cost method.

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 the contractual allowance. See “Revenue Recognition” below for further discussion. Actual results could differ materially from those estimates used in the preparation of these financial statements.

Discontinued Operations

Under ASC Topic 360-10-35, Property, Plant, and Equipment – Subsequent Measurement (formerly referred to as SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), we classify assets to be disposed of as held for sale or, if appropriate, discontinued operations when they have received appropriate approvals to be disposed of by our management or Board of Directors. Cash flows from our discontinued businesses are reflected as discontinued operating, investing, and financing activities in our statement of cash flows. The following is a description of our discontinued operations and summarized results of these operations for the three month and nine month periods ended May 31, 2011 and 2010. We had $15,177,608 of assets of discontinued operations and $917,907 of liabilities of discontinued operations as of May 31, 2011.

From March 1, 2009 to February 28, 2011, Dynacq Huai Bei Healthcare, Inc. (“Dynacq-Huai Bei”), a wholly owned subsidiary of the Company provided healthcare management services to the Second People’s Hospital in Rui An, China. Dynacq-Huai Bei was ultimately responsible for funding any operating deficits, and was entitled to any operating profits, of that hospital during the management period. Due to continued losses at the Second People’s Hospital, the Company has made the decision to terminate the management agreement with the Rui An City Department of Health, and is currently in negotiation with them to finalize the terms, including the effective date of termination. The Company has written off the fixed assets and inventory balances as of February 28, 2011, and does not expect any further losses due to the termination of this management agreement related to the Second People’s Hospital.

In August 2010, the Board of Directors of the Company approved a plan to dispose of the two hospitals (the Pasadena facility and the Garland facility) included in our U.S. Division in prior years. Both facilities have experienced decreases in net patient revenues and number of cases, generally attributable to the loss of physicians from our medical staffs and to the general economic downturn resulting in fewer elective surgeries. The opening of a new hospital near our Garland facility has had a direct adverse impact on our ability to retain members of the medical staff at that facility and consequently on our patient volume. Neither of these facilities is currently profitable, and the Board of Directors believes this plan of disposal is in the Company’s best interest. The facilities will continue to be operated by the Company until such time as they are sold.

We plan to market both hospital facilities for sale, with completion of the sales as soon as reasonably practicable. We do not expect to incur any material costs associated with termination of employment of the affected employees beyond accrued obligations for salary and benefits. The Board of Directors and management have not yet determined an estimate of any other costs associated with the foregoing disposal activities either by type or in total

nor the amount of any charge that will result in future cash expenditures. The Company had an independent appraisal done for both the hospitals, and based on each hospital’s valuation, expected sale proceeds, and expected cash flows, has determined that there is no impairment charge required in connection with the foregoing disposal activities. Because we do not intend to sell the accounts receivable of hospitals in discontinued operations, the receivables are included in our accounts receivable in the accompanying Consolidated Balance Sheets.

The summarized operating results and financial position data of our discontinued operations were as follows:

Discontinued Operations


	Three Months Ended May 31, 2011								Three Months Ended May 31, 2010
	China		U.S. Hospitals			Total			China			U.S. Hospitals			Total
Net patient service revenue	$	—	$	(8,925,463	)	$	(8,925,463	)	$	538,651		$	4,344,388		$	4,883,039

Costs and expenses:
Compensation and benefits		—		1,718,762			1,718,762			260,887			2,679,895			2,940,782
Medical services and supplies		—		568,362			568,362			296,164			1,266,120			1,562,284
Other operating expenses		—		1,488,456			1,488,456			57,115			2,185,217			2,242,332
Depreciation and amortization		—		—			—			2,157			222,639			224,796

Total costs and expenses		—		3,775,580			3,775,580			616,323			6,353,871			6,970,194

Operating loss		—		(12,701,043	)		(12,701,043	)		(77,672	)		(2,009,483	)		(2,087,155	)
Other income (expense), net		—		(1,726,059	)		(1,726,059	)		4,719			28,672			33,391

Loss before income taxes		—		(14,427,102	)		(14,427,102	)		(72,953	)		(1,980,811	)		(2,053,764	)
Benefit for income taxes		—		5,048,931			5,048,931			25,667			692,628			718,295

Loss on discontinued operations, net of taxes		—		(9,378,171	)		(9,378,171	)		(47,286	)		(1,288,183	)		(1,335,469	)

Loss on disposal of discontinued assets		—		—			—			—			—			—
Benefit for income taxes		—		—			—			—			—			—

Loss on disposal of discontinued operations, net of taxes		—		—			—			—			—			—

Total loss on discontinued operations, net of taxes	$	—	$	(9,378,171	)	$	(9,378,171	)	$	(47,286	)	$	(1,288,183	)	$	(1,335,469	)



	Nine Months Ended May 31, 2011									Nine Months Ended May 31, 2010
	China			U.S. Hospitals			Total			China			U.S. Hospitals			Total
Net patient service revenue	$	831,232		$	(3,498,786	)	$	(2,667,554	)	$	1,569,427		$	18,456,714		$	20,026,141

Costs and expenses:
Compensation and benefits		548,269			5,259,770			5,808,039			830,609			8,231,057			9,061,666
Medical services and supplies		406,452			1,828,634			2,235,086			816,959			5,774,935			6,591,894
Other operating expenses		142,852			4,437,225			4,580,077			202,348			8,593,305			8,795,653
Depreciation and amortization		11,260			—			11,260			10,339			670,650			680,989

Total costs and expenses		1,108,833			11,525,629			12,634,462			1,860,255			23,269,947			25,130,202

Operating loss		(277,601	)		(15,024,415	)		(15,302,016	)		(290,828	)		(4,813,233	)		(5,104,061	)
Other income (expense), net		96,089			(1,711,095	)		(1,615,006	)		57,926			155,925			213,851

Loss before income taxes		(181,512	)		(16,735,510	)		(16,917,022	)		(232,902	)		(4,657,308	)		(4,890,210	)
Benefit for income taxes		62,888			5,848,720			5,911,608			80,634			1,612,418			1,693,052

Loss on discontinued operations, net of taxes		(118,624	)		(10,886,790	)		(11,005,414	)		(152,268	)		(3,044,890	)		(3,197,158	)

Loss on disposal of discontinued assets		(187,041	)		—			(187,041	)		—			—			—
Benefit for income taxes		65,464			—			65,464			—			—			—

Loss on disposal of discontinued operations, net of taxes		(121,577	)		—			(121,577	)		—			—			—

Total loss on discontinued operations, net of taxes	$	(240,201	)	$	(10,886,790	)	$	(11,126,991	)	$	(152,268	)	$	(3,044,890	)	$	(3,197,158	)


	May 31, 2011						August 31, 2010
	China		U.S. Hospitals		Total		China		U.S. Hospitals		Total
Current assets	$	118,734	$	966,292	$	1,085,026	$	250,246	$	1,248,285	$	1,498,531
Property and equipment, net		—		14,092,582		14,092,582		94,571		13,951,367		14,045,938

Total assets	$	118,734	$	15,058,874	$	15,177,608	$	344,817	$	15,199,652	$	15,544,469

Current liabilities:
Accounts payable and accrued liabilities	$	604,302	$	—	$	604,302	$	646,120	$	—	$	646,120
Capital lease obligations		—		313,605		313,605		—		378,694		378,694

Total liabilities	$	604,302	$	313,605	$	917,907	$	646,120	$	378,694	$	1,024,814

Net Loss per Share

The following table presents the computation of basic and diluted loss per common share attributable to the Company:


	Three months ended May 31,						Nine months ended May 31,
	2011			2010			2011			2010
Basic and diluted loss per common share:
Numerator:
Loss from continuing operations	$	(648,016	)	$	(1,053,373	)	$	(1,735,960	)	$	(3,452,274	)
Less: Net loss attributable to noncontrolling interest		1,532			67,202			4,294			156,709

Loss from continuing operations attributable to Dynacq Healthcare, Inc.		(646,484	)		(986,171	)		(1,731,666	)		(3,295,565	)
Discontinued operations, net of income taxes		(9,378,171	)		(1,335,469	)		(11,005,414	)		(3,197,158	)
Loss on disposal of discontinued operations, net of income taxes		—			—			(121,577	)		—

Net loss attributable to Dynacq Healthcare, Inc.	$	(10,024,655	)	$	(2,321,640	)	$	(12,858,657	)	$	(6,492,723	)

Denominator:
Basic and diluted average common shares outstanding		14,176,960			14,196,141			14,176,960			14,731,232

Basic and diluted loss per common share:
Loss from continuing operations attributable to Dynacq Healthcare, Inc.	$	(0.05	)	$	(0.07	)	$	(0.12	)	$	(0.22	)
Discontinued operations, net of income taxes		(0.66	)		(0.09	)		(0.78	)		(0.22	)
Loss on disposal of discontinued operations, net of income taxes		—			—			(0.01	)		—

Net loss attributable to Dynacq Healthcare, Inc.	$	(0.71	)	$	(0.16	)	$	(0.91	)	$	(0.44	)

Basic net income (loss) per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted net income (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 income (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 income (loss) per share. Stock options with exercise prices exceeding current market prices that were excluded from the computation of net income (loss) per share amounted to approximately 921,000 shares and 620,000 shares for the quarter ended May 31, 2011 and 2010, respectively.

Stock Based Compensation

The Company’s 2000 Incentive Plan (the “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 Plan. As of May 31, 2011, there remain 2,854,154 shares which can be issued under the Plan, after giving effect to stock splits and shares issued under the Plan. The Plan permits stock awards, stock appreciation rights, performance units, and other stock-based awards, all of which may or may not be subject to the achievement of one or more performance objectives.

The purposes of the Plan generally are to retain and attract persons of training, experience and ability to serve as employees of the Company and its subsidiaries and to serve as non-employee directors of the Company, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of the Company and its subsidiaries.

The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the date of grant), the number of shares, and all of the terms of the awards. The Company may at any time amend or terminate the Plan. However, no amendment that would impair the rights of any participant with respect to outstanding grants can be made without the participant’s prior consent. Stockholder approval of an amendment to the Plan is necessary only when required by applicable law or stock exchange rules.

For the three month and nine month periods ended May 31, 2011 and 2010, there were no equity-based compensation awards granted. Generally, options granted become exercisable in annual installments of 25 percent beginning on the first anniversary date, and expire after five to ten years. The following table summarizes the stock option activities for the nine months ended May 31, 2011 (share amounts in thousands):


	Shares			Weighted Average Option Exercise Price Per Share		Weighted Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value⁽¹⁾
Outstanding, August 31, 2010		1,278		$	3.52		$ —		$ —
Granted		—			—		—		—
Exercised		—			—		—		—
Expired or canceled		(385	)		4.29		—		—

Outstanding, May 31, 2011		893		$	3.20		$ —		$ —

⁽¹⁾

These amounts represent the difference between the exercise price and the closing price of Dynacq common stock on May 31, 2011 and August 31, 2010, as reported on the NASDAQ stock market, for all in-the-money options outstanding. For exercised options, intrinsic value represents the difference between the exercise price and the closing price of Dynacq common stock on the date of exercise.

For the nine months ended May 31, 2011 and 2010, the Company received $-0- and $89,688, respectively, for stock options exercised. Total tax benefit realized for the tax deductions from stock options exercised was $-0- and $9,000 for the nine months ended May 31, 2011 and 2010, respectively.

The following summarizes information related to stock options outstanding at May 31, 2011, and related weighted average price and life information:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
	(Share Amounts In Thousands)
$ 2.50 – 2.75		645		2.1	$	2.54		466	$	2.54
$ 4.90 – 4.96		248		3.4		4.90		248		4.90

Total		893		2.4	$	3.20		714	$	3.36

In July 2008, a performance share award was granted by the Compensation Committee to an employee whereby the employee could have earned up to 1 million shares of the Company’s common stock if certain operating performance criteria were met. In connection with renegotiation of this employee’s arrangements with the Company, this performance award was cancelled effective as of July 15, 2010. Such shares are not reflected in the above tables for stock option activities and stock options outstanding.

For the three months ended May 31, 2011 and 2010, stock-based compensation expense associated with the Company’s stock options was $78,369 and $112,879, respectively. For the nine months ended May 31, 2011 and 2010, stock-based compensation expense associated with the Company’s stock options was $82,620 and $338,637, respectively. Compensation expense for all outstanding stock options as of May 31, 2011 has been recognized.

Subsequent to the quarter ended May 31, 2011, on July 7, 2011, Dr. Garry Craighead became the Company’s Chief Development Officer upon execution of an Employment Agreement and a Notice of Grant of Stock Option which granted Dr. Craighead an additional 125,000 shares of Dynacq common stock restricted pursuant to SEC Rule 144 as additional compensation. Further, under said Employment Agreement the Company granted Dr. Craighead an incentive stock option to purchase 1,500,000 shares of common stock of the Company pursuant to the Company’s Year 2000 Stock Incentive Plan, and the Company will pay Dr. Craighead an annual salary of $200,000. It will further grant Dr. Craighead an incentive stock option to purchase an additional 3,000,000 shares of common stock of the Company, subject to the adoption of a Year 2011 Stock Incentive Plan. Both the Year 2011 Stock Incentive Plan and the grant of the additional 3,000,000 shares have been approved by the Board of Directors and the Compensation Committee and are subject to approval by the shareholders. The entire 4,500,000 stock option grants are performance awards attributable to his efforts. Specifically, 15,000 shares will vest based on the employee’s obtainment of each $1,000,000 of net collections for the Company, up to the maximum of 4,500,000 shares over five years.

Additionally, subsequent to the quarter ended May 31, 2011, on July 7, 2011, the Compensation Committee granted an aggregate of 1.4 million stock options with an exercise price of $1.86 to all full time employees with a minimum of one year of employment with the Company. These stock options will vest in annual installments of 25 percent beginning on the first anniversary date.

Fair Value of Financial Instruments

On September 1, 2008, the Company adopted ASC Topic 825-10-25, “Financial Instruments” (formerly referred to as SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“SFAS 159”)), which permits entities to choose to measure certain financial assets and liabilities at fair value. The adoption of ASC Topic 825-10-25 had no impact on the consolidated financial statements because the Company did not elect the fair value option for any financial assets or financial liabilities that were not already recorded at fair value.

On September 1, 2008, the Company adopted ASC Topic 820, “Fair Value Measurements and Disclosures” (formerly referred to as SFAS 157) for our financial assets and liabilities. Management uses the fair value hierarchy of ASC Topic 820, which gives the highest priority to quoted prices in active markets. 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. ASC Topic 820 defines fair value 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. As a basis for considering such assumptions, ASC Topic 820 establishes a three-level fair value hierarchy that 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.

disaggregation of the types of activity that were previously disclosed in the rollforward of Level 3 fair value disclosures. Further, the guidance clarifies the level of aggregation of assets and liabilities within the fair value hierarchy that may be presented. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

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 May 31, 2011, 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	$	—	$	24,991,332	$	—
Trading securities		1,295,519		—		—

The Company’s investments in Level 1 are in equity stocks at a cost of $1,415,664. The Company’s investments in Level 2 are in perpetual bonds traded on the European markets, at a cost of $9,135,146.

Foreign Currency Translation

The functional currency of the Company as a whole is the U.S. Dollar. The Company has designated the Chinese Yuan Renminbi as the functional currency for its subsidiaries in mainland China, and the U.S. Dollar for Sino Bond in Hong Kong. Assets and liabilities are translated into U.S. dollars using current exchange rates as of the balance sheet date. Income and expense are translated at average exchange rates prevailing during the period. The effects of foreign currency translation adjustments are included as a component of Accumulated Other Comprehensive Income within Stockholders’ Equity.

Revenue Recognition

Discontinued Operations

Revenue Recognition Policy

In China, the local government Department of Health establishes billing rates for a hospital’s sale of prescription medication and medical services. A majority of the services provided by the Second People’s Hospital is to cash pay patients, who pay for the services in advance. For services provided under the local government’s social healthcare insurance program, we are generally paid at approximately 95% of billed charges two to three months after the date of service. The remaining 5% of billed charges is evaluated by the local government Department of Health on a semi-annual basis and may be paid to the hospital after that evaluation is complete. As of February 28, 2011, the Company has made the decision to terminate the management agreement with the Rui An City Department of Health, and is currently in negotiation with them to finalize the terms, including the effective date of termination. The Company had no operations at Second People’s Hospital during the three months ended May 31, 2011, and incurred $1,815 in bad debt expenses for the three months ended May 31, 2010, and $24,755 and $11,812 for the nine months ended May 31, 2011 and 2010, respectively, related to denials under the social healthcare insurance program. Since the amount of bad debt expense is minimal, it has been included with Other Operating Expenses in the income statement.

Accounts Receivable

Accounts receivable represent net receivables for services provided by the Company. At each balance sheet date management reviews the accounts receivable for collectibility.

Discontinued Operations - (U.S. Hospitals)

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 gross revenue as services are delivered. Gross billed revenues are then reduced by the Company’s estimate of the discount (contractual allowance) to arrive at net patient service revenues. Net patient service revenues may not represent amounts ultimately collected. The Company adjusts current period revenue for actual differences in estimated revenue recorded in prior periods and actual cash collections.

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. The following table shows gross revenues and contractual allowances for the three and nine months ended May 31, 2011 and 2010:


	Three months ended May 31,						Nine months ended May 31,
	2011			2010			2011			2010
Gross billed charges	$	6,135,823		$	15,593,504		$	20,784,155		$	67,277,497
Contractual allowance⁽¹⁾		15,061,286			11,249,116			24,282,941			48,820,783

Net revenue	$	(8,925,463	)	$	4,344,388		$	(3,498,786	)	$	18,456,714

Contractual allowance percentage⁽¹⁾		245	%		72	%		117	%		73	%

⁽¹⁾	The contractual allowance percentage, excluding the stop-loss fee dispute amount booked in the quarter ended May 31, 2011, which is discussed below, would have been 66% and 64% for the three months and nine months ended May 31, 2011, respectively.

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 one of our hospitals 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.

Based on these Guidelines, the reimbursement due the Company for workers’ compensation cases is lower than we previously experienced. The Company has continued accepting Texas workers’ compensation cases, and has not made any substantial changes in its focus towards such cases. Our net patient service revenue for Texas workers’ compensation cases as a percentage of gross billings has decreased primarily as a result of lower reimbursement rates for workers’ compensation procedures still being performed.

Should we disagree with the amount of reimbursement provided by a third-party payer, we are required to pursue the 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. The 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, once the definitions of those standards are determined. 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, pending a final, non-appealable decision.

A petition asking the Texas Supreme Court to review the Third Court of Appeals decision has been denied. Therefore, the Company is bound by the Third Court of Appeals decision. The Texas Supreme Court’s decision has further 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 is not anticipated during the 2011 fiscal year.

Through May 2011, 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, the carriers have requested refunds of the payments made in the event that the SOAH decisions and orders are reversed on appeal. Our request that the TDWC Commissioner enforce the awards which were not voluntarily paid by the carriers was refused in approximately 130 cases. Motions filed seeking a refund in some cases in which the awards were voluntarily paid have been granted and the Company has been ordered to refund approximately $3.7 million, including prejudgment interest, pending remand for a case-by-case determination of whether the services provided were unusually costly and unusually extensive. We anticipate that similar motions requesting remand and a refund for awards voluntarily paid will be filed and will likely be granted by the 345th Judicial District Court of Travis County, Texas. If and when these additional motions are granted, the Company will be ordered to refund an additional $7.7 million, not including prejudgment interest. The Company plans on appealing the orders requiring a refund to the carriers. The appeal of the refund orders will progress simultaneously to the adjudication of those cases remanded for determinations of whether the services provided were unusually costly and unusually extensive. Voluntary payments made pursuant to the Decisions and Orders are premature payments by the carriers and will likely be ordered to be refunded. Once the Company is given the opportunity to present its evidence regarding whether the services provided were unusually costly and unusually extensive, the Company anticipates that it will prevail in the underlying stop-loss fee disputes and that voluntary payments refunded to the carriers will be recaptured.

Due to the uncertainties associated with these stop-loss fee dispute cases, the Company has booked a loss of $11,034,573 in contractual allowance, and $1,744,731 in interest expense during the quarter ended May 31, 2011.

Claims regarding payment for hospital outpatient services remain pending at the TDWC. It is expected that these claims will be adjudicated at SOAH and ultimately in the Texas district and appellate courts. The basis for reimbursement for these services made the subject of these pending cases is the determination of “fair and reasonable” charges. In 2007, we received unfavorable rulings from SOAH in all of our appeals of unfavorable

decisions related to services provided in 2001 and 2002. The 179 cases, which have been appealed to the Travis County district courts, challenge the constitutionality of the relevant statutory language. The Company received an unfavorable ruling in its lead case in March 2009, which ruling has been 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. Therefore, 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 will impact cases in which a fee guideline was not applicable, specifically all pending cases involving ambulatory surgical services provided in 2001 and 2002 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 recent ruling.

We are currently pursuing claims against two healthcare agents relating to contracts with certain of our facilities which set out reimbursement guidelines by several workers’ compensation carriers at a minimum of 70% of the facility’s charges. Discovery is continuing on these claims to determine which carriers are involved, the amount of reimbursement due to us, and the data used to determine “usual and customary” market rates for medical services in specific geographic regions.

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 have virtually stopped, the Company had fully reserved all accounts receivable related to the MDR process as of August 31, 2008. Any monies collected for these MDR accounts receivable will be recorded as current period’s net patient service revenues.

Accounts Receivable

Accounts receivable represent net receivables for services provided by the Company. At each balance sheet date management reviews the accounts receivable for collectibility.

The contractual allowance stated as a percentage of gross receivables at the balance sheet dates is larger than the contractual 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 contractual allowance. The contractual allowance amounts netted against gross receivables are not adjusted until such time as the final collections on an individual receivable are recognized.

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 ranged from 1.35% to 1.75% at May 31, 2011).

Comprehensive Loss and Accumulated Other Comprehensive Income

Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) represents certain components of revenues, expenses, gains and losses that are included in comprehensive loss, but are excluded from net loss. Other comprehensive income (loss) amounts are recorded directly as an adjustment to stockholders’ equity, net of tax, and for the three months and nine months ended May 31, 2011 and 2010 were as follows:


	Three months ended May 31,						Nine months ended May 31,
	2011			2010			2011			2010
Net loss	$	(10,024,655	)	$	(2,321,640	)	$	(12,858,657	)	$	(6,492,723	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment, net of taxes of $62,028, $4,266, $228,097 and $(1,726), respectively		115,197			7,920			423,610			(3,207	)
Change in valuation of investment available-for-sale, net of taxes of $628,420, $16,092, $986,970 and $914,255, respectively		1,167,067			29,886			1,832,944			1,697,903

Total other comprehensive loss, net of taxes		(8,742,391	)		(2,283,834	)		(10,602,103	)		(4,798,027	)
Comprehensive loss attributable to the noncontrolling interest		—			—			—			—

Comprehensive loss attributable to Dynacq Healthcare, Inc.	$	(8,742,391	)	$	(2,283,834	)	$	(10,602,103	)	$	(4,798,027	)

The components of accumulated other comprehensive income were as follows:


	May 31, 2011		August 31, 2010
Foreign currency translation adjustment, net of taxes of $430,849 and $202,752, respectively	$	790,531	$	366,918
Change in valuation of investment available-for-sale, net of taxes of $5,459,785 and $4,472,815, respectively		10,139,601		8,306,657

Total accumulated other comprehensive income, net of taxes of $5,890,634 and $4,675,567, respectively	$	10,930,132	$	8,673,575

Contingencies

The Company maintains various insurance policies that cover each of its U.S. facilities; including occurrence medical malpractice coverage. In addition, all physicians granted privileges at the Company’s U.S. facilities are required to maintain medical malpractice insurance coverage. The Company also maintains general liability and property insurance coverage for each U.S. facility, including flood coverage. The Company does not currently maintain workers’ compensation coverage in Texas. In regard to the Employee Health Insurance Plan, the Company is self-insured with specific and aggregate re-insurance with stop-loss levels appropriate for the Company’s group size. Coverage is maintained in amounts management deems adequate.

The management agreement for the Second People’s Hospital requires that 1% of the drug income, and drug income in excess of 40% of total sales, of the hospital be paid to the government. This requirement was designed to control the cost of drugs by discouraging the sale by the hospital of drugs purchased from other than approved drug vendors. However, the local government has not published a list of approved drug vendors and therefore has not enforced the payment provision since the inception of the original management agreement. The Company has been advised by a local attorney that enforcement of that provision is remote, so it has not accrued the amount that would be payable to the local government if this provision were enforced. If the government were to enforce this provision, Dynacq-Huai Bei could potentially owe approximately $1.6 million to the government for the period of time since inception of the original management contract on the hospital to May 31, 2011.

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 Revenue Recognition, as well as Business – Government Regulation – Discontinued Operations –Texas Workers’ Compensation Systems in our Form 10-K for the fiscal year ended August 31, 2010, for a detailed description of the MDR process and our accounts receivable. The Company cannot predict whether any litigation or administrative proceeding to which it is currently a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

Industry Segments and Geographic Information

China Division

From March 1, 2009 to February 28, 2011, Dynacq Huai Bei Healthcare, Inc. (“Dynacq-Huai Bei”), a wholly owned subsidiary of the Company provided healthcare management services to the Second People’s Hospital in Rui An, China. The Company organized Dynacq-Huai Bei in April 2008 under the laws of the People’s Republic of China. Although the contract to manage the Second People’s Hospital was not executed until March 1, 2009, the effective date was November 25, 2008 and Dynacq-Huai Bei has included the results of operations of that hospital from that effective date. Therefore the financial statements for the fiscal year ended August 31, 2009 included three months of results of operations by the prior manager. Dynacq-Huai Bei was ultimately responsible for funding any operating deficits, and was entitled to any operating profits, of that hospital during the management period. Due to continued losses at the Second People’s Hospital, the Company has made the decision to terminate the management agreement with the Rui An City Department of Health, and is currently in negotiation with them to finalize the terms, including the effective date of termination. The Company has written off the fixed assets and inventory balances as of February 28, 2011, and does not expect any further losses due to the termination of this management agreement related to the Second People’s Hospital. We have accounted for the operations of the Second People’s Hospital in Rui An, China as discontinued operations, and have reclassified prior period financial statements to exclude them from continuing operations.

Dynacq-Huai Bei and the Rui An City Department of Health had also previously entered into an agreement assigning to Dynacq-Huai Bei the right to manage the Third People’s Hospital in Rui An, which hospital is currently under construction. Based on continued delays in the construction of the Third People’s Hospital, however, in November 2010, Dynacq-Huai Bei and the Rui An City Department of Health mutually agreed to terminate this agreement. Accordingly, Dynacq-Huai Bei will not be managing the Third People’s Hospital.

In August 2009, the Company incorporated a wholly owned subsidiary, Hu GangJing (Hang Zhou) Technology Company Limited (“Hang Zhou Tech”) under the laws of the People’s Republic of China, as a holding company for investments in the city of Hang Zhou and other cities in China. It is anticipated that Hang Zhou Tech will invest in businesses or form joint ventures with other companies to engage in businesses such as energy, life sciences and pharmaceuticals. In December 2009, Hang Zhou Tech incorporated two wholly owned subsidiaries, namely Hang Zhou Hu GangJing Investment Management Company Limited (Hang Zhou Investment Management”), and Hang Zhou Hu GangJing Medical Investment Company Limited (“Hang Zhou Medical Investment”). Hang Zhou Tech was set up under an incentive program of the city of Hang Zhou by which the city government has offered an interest free loan of 30% of an investment in projects made by Hang Zhou Tech, up to a $1.5 million maximum. The loan is repayable within five years only if the investment in the projects is profitable. If after five years the investment is not profitable, then the city of Hang Zhou will forgive the loan in full. Hang Zhou Tech, through its subsidiary Hang Zhou Investment Management, initially plans to invest in technologies such as energy; and through its subsidiary, Hang Zhou Medical Investment plans to invest in healthcare, including pharmaceuticals. There has been no significant development in any of these projects, and Hang Zhou Tech is not currently actively pursuing any joint ventures.

In March 2010, Dynacq-Huai Bei incorporated a subsidiary, Shanghai Hu Jing Investment Management Company Limited (“Shanghai Hu Jing”) under the laws of People’s Republic of China, in which Dynacq-Huai Bei owns 90%, and Hang Zhou Tech owns 10%. 40% of Shanghai Hu Jing’s cumulative profit will be distributed to Shanghai Hu Jing Electronic Developments Co., Ltd. (“Shanghai Hu Jing Electronic”), a Company which is majority owned by the General Manager of the Company’s China Division. Shanghai Hu Jing Electronic will be the Company’s key partner in identifying and bringing various projects to the Company. The remaining cumulative profit will be distributed to Dynacq-Huai Bei and Hang Zhou Tech. In September 2010, Shanghai Hu Jing incorporated a wholly owned subsidiary, Shanghai Run Tien Enterprise, Ltd. (“Shanghai Run Tien”), to invest in

artifacts to be sold and commercial real estate rentals. The artifacts are purchased from auction houses overseas and the Company is currently seeking buyers in China. At May 31, 2011, the Company had artifacts inventory of $130,169.

The Company has also organized Sino Bond Inc. Limited, a Hong Kong corporation (“Sino Bond”) to hold and manage investments in Hong Kong. Sino Bond has entered into a marketing contract related to healthcare services by Dynacq subsidiaries in China and Southeast Asia and invests in debt and equity securities in Europe and Asia, including initial public offerings and pre-initial public offerings.

The Company through its subsidiaries in China and Hong Kong is pursuing growth opportunities in which it will expand into various operations in the following markets to achieve geographic diversity and to take advantage of various potential opportunities, including but not limited to:

•

Pharmaceuticals and medical testing kits;

•

Healthcare services;

•

Commercial real estate rental; and

•

Senior housing complex with healthcare amenities.

The various growth opportunities in China and Hong Kong are in varying stages of development, and there is no assurance that any of them will come to fruition and/or be successful.

Corporate Division

During the fiscal year ended August 31, 2009, the Company invested approximately $9.1 million of its available cash in marketable securities. As of May 31, 2011, these securities are valued at approximately $25 million. The Company intends to hold, or sell if market conditions change, and manage these investment securities until it is able to identify and fund other attractive opportunities in China. During the nine months ended May 31, 2011, the Company also traded in initial public offerings of equity securities on the Hong Kong Stock Exchange and had gains of $33,504. The Company, through a subsidiary in Hong Kong, has expanded its investments in debt and equity securities in Europe and Asia and has engaged the services of an investment banker to recommend such investment opportunities. The Company’s primary investment focus will be on growth companies from mainland China. The Company anticipates continuing making short-term investment in these entities through initial public offerings (held mostly through the Hong Kong Stock Exchange) and pre-initial public offerings.

The Corporate Division includes interest and other income related to these investments in available-for-sale and trading 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 from continuing operations is as follows:


	Three months ended May 31,						Nine months ended May 31,
	2011			2010			2011			2010
Revenues from external customers
Net patient service revenues
China Division	$	—		$	—		$	—		$	—
Corporate		—			—			—			—

Consolidated	$	—		$	—		$	—		$	—

Loss before taxes and discontinued operations
China Division	$	(482,257	)	$	(318,283	)	$	(628,422	)	$	(1,694,295	)
Corporate		(471,467	)		(1,185,559	)		(1,954,209	)		(3,293,290	)

Consolidated	$	(953,724	)	$	(1,503,842	)	$	(2,582,631	)	$	(4,987,585	)


	May 31,
	2011		2010
Total Assets
China Division	$	21,954,831	$	22,187,359
Corporate		37,809,067		39,394,267

Assets of continuing operations		59,763,898		61,581,626
Assets of discontinued operations		15,177,608		15,719,445

Consolidated	$	74,941,506	$	77,301,071

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report on Form 10-Q contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Such forward-looking statements relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements, including risks and uncertainties associated with the healthcare industry in Asia and the United States, general economic conditions in Asia, and such other risks and uncertainties described in “Risk Factors” in our annual report on Form 10-K for the fiscal year ended August 31, 2010. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You must read the following discussion of the results of our business and our operations and financial condition in conjunction with our reviewed consolidated financial statements, including the notes, included in this quarterly report on Form 10-Q and our audited consolidated financial statements, including the notes, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010.

Update on Critical Accounting Policies and Estimates

There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position for the quarter ended May 31, 2011. For a discussion of our critical accounting policies see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended August 31, 2010.

Subsequent Event

Results of Operations


	Three Months Ended May 31, 2011									Three Months Ended May 31, 2010
	China Division			Corporate			Total			China Division			Corporate			Total
Net patient service revenue	$	—		$	—		$	—		$	—		$	—		$	—

Costs and expenses:
Compensation and benefits		509			699,800			700,309			37,500			984,101			1,021,601
Other operating expenses		524,584			419,722			944,306			354,899			370,230			725,129
Depreciation and amortization		28,888			13,621			42,509			27,689			21,453			49,142

Total costs and expenses		553,981			1,133,143			1,687,124			420,088			1,375,784			1,795,872

Operating loss		(553,981	)		(1,133,143	)		(1,687,124	)		(420,088	)		(1,375,784	)		(1,795,872	)

Other income (expense):
Rent and other income (expense)		22,572			288,181			310,753			(41,981	)		(207,012	)		(248,993	)
Interest income		49,152			377,086			426,238			143,786			398,996			542,782
Interest expense		—			(3,591	)		(3,591	)		—			(1,759	)		(1,759	)

Total other income, net		71,724			661,676			733,400			101,805			190,225			292,030

Loss before income taxes from continuing operations	$	(482,257	)	$	(471,467	)		(953,724	)	$	(318,283	)	$	(1,185,559	)		(1,503,842	)

Benefit for income taxes								305,708									450,469

Loss from continuing operations								(648,016	)								(1,053,373	)
Discontinued operations, net of income taxes								(9,378,171	)								(1,335,469	)
Loss on disposal of discontinued operations, net of income taxes								—									—

Net loss								(10,026,187	)								(2,388,842	)
Less: Net loss attributable to noncontrolling interest								1,532									67,202

Net loss attributable to Dynacq Healthcare, Inc.							$	(10,024,655	)							$	(2,321,640	)

Operational statistics (Number of medical procedures) for discontinued operations in the U.S.:
Inpatient:
Bariatric								17									29
Orthopedic								3									61
Other								9									22

Total inpatient procedures								29									112

Outpatient:
Orthopedic								27									83
Other								198									221

Total outpatient procedures								225									304

Total procedures								254									416

Results of Operations (continued)


	Nine Months Ended May 31, 2011									Nine Months Ended May 31, 2010
	China Division			Corporate			Total			China Division			Corporate			Total
Net patient service revenue	$	—		$	—		$	—		$	—		$	—		$	—

Costs and expenses:
Compensation and benefits		58,341			2,047,553			2,105,894			112,500			2,897,877			3,010,377
Other operating expenses		1,433,683			1,413,725			2,847,408			1,616,120			1,461,890			3,078,010
Depreciation and amortization		85,925			57,458			143,383			80,705			42,838			123,543

Total costs and expenses		1,577,949			3,518,736			5,096,685			1,809,325			4,402,605			6,211,930

Operating loss		(1,577,949	)		(3,518,736	)		(5,096,685	)		(1,809,325	)		(4,402,605	)		(6,211,930	)

Other income (expense):
Rent and other income (expense)		800,963			459,048			1,260,011			(71,183	)		(107,585	)		(178,768	)
Interest income		148,564			1,116,924			1,265,488			186,213			1,223,072			1,409,285
Interest expense		—			(11,445	)		(11,445	)		—			(6,172	)		(6,172	)

Total other income, net		949,527			1,564,527			2,514,054			115,030			1,109,315			1,224,345

Loss before income taxes from continuing operations	$	(628,422	)	$	(1,954,209	)		(2,582,631	)	$	(1,694,295	)	$	(3,293,290	)		(4,987,585	)

Benefit for income taxes								846,671									1,535,311

Loss from continuing operations								(1,735,960	)								(3,452,274	)
Discontinued operations, net of income taxes								(11,005,414	)								(3,197,158	)
Loss on disposal of discontinued operations, net of income taxes								(121,577	)								—

Net loss								(12,862,951	)								(6,649,432	)
Less: Net loss attributable to noncontrolling interest								4,294									156,709

Net loss attributable to Dynacq Healthcare, Inc.							$	(12,858,657	)							$	(6,492,723	)

Operational statistics (Number of medical procedures) for discontinued operations in the U.S.:
Inpatient:
Bariatric								60									122
Orthopedic								23									237
Other								21									79

Total inpatient procedures								104									438

Outpatient:
Orthopedic								86									361
Other								597									800

Total outpatient procedures								683									1,161

Total procedures								787									1,599

Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010

China Division

We have accounted for the operations of the Second People’s Hospital in Rui An, China as discontinued operations, and have reclassified prior period financial statements to exclude them from continuing operations.

Total costs and expenses increased by $133,893, from $420,088 for the quarter ended May 31, 2010 to $553,981 for the quarter ended May 31, 2011. The following discusses the various changes in costs and expenses:

•

Compensation and benefits decreased by $36,991 due to reduction in staff.

•

Other operating expenses includes primarily administrative expenses for managing the various projects the Company is undertaking, related marketing expenses and rent for an apartment for the Chief Executive Officer in Hong Kong. Other operating expenses increased by $169,685, from $354,899 for the quarter ended May 31, 2010 to $524,584 for the quarter ended May 31, 2011. The Company has made the decision to not pursue the business of sale of artifacts, and wrote down its inventory by $127,771 in the quarter ended May 31, 2011. In addition, marketing expenses increased by $75,000, from $75,000 for the quarter ended May 31, 2010 to $150,000 for the quarter ended May 31, 2011.

Rent and other income (expense) of $22,572 and $(41,981) for the quarter ended May 31, 2011 and 2010, respectively, primarily relates to foreign currency exchange gains (losses).

Corporate Division

Compensation and benefits for the Corporate Division includes $78,369 and $112,879 of non-cash compensation expense for the quarter ended May 31, 2011 and 2010, respectively, related to employees’ incentive stock options granted in fiscal year 2007 and 2008. It also includes all corporate personnel compensation and benefits. The decrease of approximately 29% in 2011, compared to 2010, is due to a reduction in corporate staff as well as reduction in compensation to the Chief Executive Officer and the Chief Financial Officer of the Company for the fiscal quarter in 2011.

Other operating expenses includes various general and administrative expenses for day to day running of the Company, including professional fees such as legal expenses and audit expenses. The increase in other operating expenses of $49,492, from $370,230 for the quarter ended May 31, 2010 to $419,722 for the quarter ended May 31, 2011 relates to a general increase in administrative expenses.

Rent and other income of $288,181 for the quarter ended May 31, 2011 includes foreign currency exchange gains of $88,445 primarily on investments in Euro bonds, gains of $48,499 on short-term investments in the equity securities in Hong Kong and other miscellaneous income primarily related to its Baton Rouge facility, which was sold in 2007. Rent and other income (expense) of $(207,012) for the quarter ended May 31, 2010 primarily includes foreign currency exchange losses.

Interest income of $377,086 and $398,996 for the quarter ended May 31, 2011 and 2010, respectively, are primarily related to the Company’s investments in bonds.

Investments in securities

Investments in bonds, which were purchased at a cost of $9,135,146 during fiscal year 2009, have appreciated in fair value by an additional $15,856,186. Of that amount, $85,692 and $(212,527) in foreign currency exchange gains (losses) is included in rent and other income in the consolidated statements of operations for the quarter ended May 31, 2011 and 2010, respectively. Unrealized gains in these investments of $15,599,386 are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at May 31, 2011, net of taxes of $5,459,785.

The Company has invested in initial public offerings of equity securities on the Hong Kong Stock Exchange, and as of May 31, 2011, is holding these trading securities with a fair market value of $1,295,519. The cost of these securities was $1,415,664. Unrealized losses in these investments of $120,145 are included in rent and other income in the Consolidated Statements of Operations. The Company had a net gain of $48,499 on short-term investments in the equity securities in Hong Kong for the quarter ended May 31, 2011.

Discontinued Operations

China

U.S. Hospitals

Excluding the above mentioned stop-loss contractual allowance of $11,034,573, net patient service revenue decreased by $2,235,277, or 51%, from $4,344,388 to $2,109,111, and total surgical cases decreased by 39% from 416 cases for the quarter ended May 31, 2010 to 254 cases for the quarter ended May 31, 2011. The following are the percentage changes in net patient service revenues and number of cases at the hospital facilities:


	Percentage decrease from quarter ended May 31, 2010 to quarter ended May 31, 2011
Facility	Net patient revenue	Cases
Pasadena	(20)%	(21)%
Garland	(85)	(65)
Overall	(51)	(39)

The decrease in net patient service revenue was due to an overall decrease in number of cases by 39% in the quarter ended May 31, 2011 compared to the quarter ended May 31, 2010. While the number of cases decreased by 39%, net patient service revenue decreased by 51%. The higher percentage decrease in net patient service revenue compared to the decrease in number of cases is primarily due to a decrease in gross billed charges by 61%, due to a change in the surgical mix of cases. There was a decrease of 74% in inpatient cases, which typically have higher average reimbursement per case compared to outpatient cases.

Decreases in net patient revenues and number of cases are generally attributable to the loss of physicians from our medical staffs and to the general economic downturn which resulted in fewer elective surgeries. In Garland, the opening of a new hospital nearby had a direct adverse impact on our ability to retain members of the medical staff at that facility and consequently on our patient volume.

Total costs and expenses decreased by $2,578,291, or 41%, from $6,353,871 for the quarter ended May 31, 2010 to $3,775,580 for the quarter ended May 31, 2011. The following discusses the various changes in costs and expenses:

•

Compensation and benefits decreased by $961,133, or 36%, primarily associated with reduction in workforce due to lower net patient service revenues.

•

Medical services and supplies expenses decreased by $697,758, or 55%, while the number of surgery cases decreased 39%. The percentage decrease in medical services and supplies was higher than the percentage decrease in the number of surgery cases due to a 74% decrease in inpatient cases, which typically require more medical services and supplies, and also due to a change in the surgical mix of cases.

•

Other operating expenses decreased by $696,761, or 32%. Marketing expenses, included in other operating expenses, decreased by $421,575, from $600,000 for the quarter ended May 31, 2010 to $178,425 for the quarter ended May 31, 2011. The decrease in marketing expenses and in other operating expenses was associated with lower net revenues.

•

Depreciation and amortization expenses decreased by $222,639 in 2011 compared to 2010. Our long-lived assets for discontinued operations of our U.S. facilities are measured at the lower of its carrying amount or fair value less cost to sell. We believe that the carrying value of the U.S. facilities at May 31, 2011 was less than the estimated fair value less cost to sell, and no adjustment to the carrying value of this long-lived asset was necessary during the quarter ended May 31, 2011. We ceased the depreciation of the property and equipment related to the U.S. facilities starting September 1, 2010.

Other income (expense) for the quarter ended May 31, 2011 of $(1,726,059) includes interest expense of $1,744,731 associated with the stop-loss cases discussed above.

The benefit for income taxes for the quarter ended May 31, 2011 and 2010 was 35.0%.

Nine Months Ended May 31, 2011 Compared to the Nine Months Ended May 31, 2010

China Division

Total costs and expenses decreased by $231,376, from $1,809,325 for the nine months ended May 31, 2010 to $1,577,949 for the nine months ended May 31, 2011. The following discusses the various changes in costs and expenses:

•

Compensation and benefits decreased by $54,159 due to reduction in staff.

•

Other operating expenses includes primarily administrative expenses for managing the various projects the Company is undertaking, related marketing expenses and rent for an apartment for the Chief Executive Officer in Hong Kong. Other operating expenses decreased by $182,437, from $1,616,120 for the nine months ended May 31, 2010 to $1,433,683 for the nine months ended May 31, 2011. Marketing expenses decreased by $225,000, from $675,000 for the nine months ended May 31, 2010 to $450,000 for the nine months ended May 31, 2011.

Rent and other income of $800,963 for the nine months ended May 31, 2011 includes a $720,696 refund received from the Rui An City Department of Health as part of the negotiation of termination of the assignment agreement to manage the Third People’s Hospital, and write-off of associated liabilities of $43,840. The decision to terminate the agreement was based on the continued delays in the construction of the hospital. Rent and other income (expense) for the nine months ended May 31, 2010 of $(71,183) primarily relates to foreign currency exchange losses.

Corporate Division

Compensation and benefits for the Corporate Division includes $82,620 and $338,637 of non-cash compensation expense for the nine months ended May 31, 2011 and 2010, respectively, related to employees’ incentive stock options granted in fiscal year 2007 and 2008. It also includes all corporate personnel compensation and benefits. The decrease of approximately 29% in 2011, compared to 2010, is due to the non-cash compensation expense true-up in 2011 based on forfeiture of incentive stock options, and due to a reduction in corporate staff as well as reduction in compensation to the Chief Executive Officer and the Chief Financial Officer of the Company for part of the period in 2011.

Other operating expenses includes various general and administrative expenses for day to day running of the Company, including professional fees such as legal expenses and audit expenses. The marginal decrease in other operating expenses of $48,165, from $1,461,890 for the nine months ended May 31, 2010 to $1,413,725 for the nine months ended May 31, 2011 relates to a general decrease in administrative expenses.

Rent and other income of $459,048 for the nine months ended May 31, 2011 includes foreign currency exchange gains of $256,311 primarily on investments in Euro bonds, a gain of $33,504 on short-term investments in the equity securities in Hong Kong and other miscellaneous income primarily related to its Baton Rouge facility, which was sold in 2007. Rent and other income (expense) of $(107,585) for the nine months ended May 31, 2010 includes foreign currency exchange losses of $364,219 primarily on investments in Euro bonds, partially offset by gains of $193,291 on short-term investments in the equity securities in Hong Kong.

Interest income of $1,116,924 and $1,223,072 for the nine months ended May 31, 2011 and 2010, respectively, are primarily related to the Company’s investments in bonds.

Investments in securities

Investments in bonds, which were purchased at a cost of $9,135,146 during fiscal year 2009, have appreciated in fair value by an additional $15,856,186. Of that amount, $250,017 and $(337,867) in foreign currency exchange gains (losses) is included in rent and other income in the consolidated statements of operations for the nine months ended May 31, 2011 and 2010, respectively. Unrealized gains in these investments of $15,599,386 are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at May 31, 2011, net of taxes of $5,459,785.

The Company has invested in initial public offerings of equity securities on the Hong Kong Stock Exchange, and as of May 31, 2011, is holding these trading securities with a fair market value of $1,295,519. The cost of these securities was $1,415,664. Unrealized losses in these investments of $120,145 are included in rent and other income in the Consolidated Statements of Operations. The Company had a net gain of $33,504 on short-term investments in the equity securities in Hong Kong for the nine months ended May 31, 2011.

Discontinued Operations

China

Due to continued losses at the Second People’s Hospital, the Company has made the decision to terminate the management agreement as of February 28, 2011 with the Rui An City Department of Health, and is currently in negotiation with them to finalize the terms, including the effective date of termination. The net loss at the Second People’s Hospital for the six months ended February 28, 2011, which is the termination date of the management agreement, was $240,201. The net loss for the nine months ended May 31, 2010 at the Second People’s Hospital was $152,268. The increase in loss during the current period is due to a reduction in revenues, and also due to write-down of fixed assets and inventory of $121,577, net of income taxes.

U.S. Hospitals

Excluding the above mentioned stop-loss contractual allowance of $11,034,573, net patient service revenue decreased by $10,920,927, or 59%, from $18,456,714 to $7,535,787, and total surgical cases decreased by 51% from 1,599 cases for the nine months ended May 31, 2010 to 787 cases for the nine months ended May 31, 2011. The following are the percentage changes in net patient service revenues and number of cases at the hospital facilities:


	Percentage decrease from nine months ended May 31, 2010 to nine months ended May 31, 2011
Facility	Net patient revenue	Cases
Pasadena	(39)%	(41)%
Garland	(82)	(65)
Overall	(59)	(51)

The decrease in net patient service revenue was due to an overall decrease in number of cases by 51% in the nine months ended May 31, 2011 compared to the nine months ended May 31, 2010. While the number of cases decreased by 51%, net patient service revenue decreased by 59%. The higher percentage decrease in net patient service revenue compared to the decrease in the number of cases is primarily due to a decrease in gross billed charges by 69% due to a change in the surgical mix of cases. There was a decrease of 76% in inpatient cases, which typically have higher average reimbursement per case compared to outpatient cases.

Total costs and expenses decreased by $11,744,318, or 50%, from $23,269,947 for the nine months ended May 31, 2010 to $11,525,629 for the nine months ended May 31, 2011. The following discusses the various changes in costs and expenses:

•

Compensation and benefits decreased by $2,971,287, or 36%, primarily associated with reduction in workforce due to lower net patient service revenues.

•

Medical services and supplies expenses decreased by $3,946,301, or 68%, while the number of surgery cases decreased 51%. The percentage decrease in medical services and supplies was higher than the percentage decrease in the number of surgery cases due to a 76% decrease in inpatient cases, which typically require more medical services and supplies, and also due to a change in the surgical mix of cases.

•

Other operating expenses decreased by $4,156,080, or 48%. Marketing expenses, included in other operating expenses, decreased by $2,942,435, from $3,300,000 for the nine months ended May 31, 2010 to $357,565 for the nine months ended May 31, 2011. The decrease in marketing expenses and in other operating expenses was associated with lower net revenues.

•

Depreciation and amortization expenses decreased by $670,650 in 2011 compared to 2010. Our long-lived assets for discontinued operations of our U.S. facilities are measured at the lower of its carrying amount or fair value less cost to sell. We believe that the carrying value of the U.S. facilities at May 31, 2011 was less than the estimated fair value less cost to sell, and no adjustment to the carrying value of this long-lived asset was necessary during the nine months ended May 31, 2011. We ceased the depreciation of the property and equipment related to the U.S. facilities starting September 1, 2010.

Other income (expense) for the quarter ended May 31, 2011 of $(1,711,095) includes interest expense of $1,744,731 associated with the stop-loss cases discussed above.

The benefit for income taxes for the nine months ended May 31, 2011 and 2010 was 34.9% and 34.6%, respectively.

Liquidity and Capital Resources

Our 2010 Annual Report on Form 10-K includes a detailed discussion of our liquidity, contractual obligations and commitments. The information presented below updates and should be read in conjunction with the information disclosed in that Form 10-K.

Cash flow from operating activities

Cash flow provided by operating activities for continuing activities was $807,518 during the nine months ended May 31, 2011, primarily due to net changes in income tax related accounts of $1,719,210 and decreases in accounts receivable of $1,271,784, partially offset by net loss before discontinued operations of $1,731,666 and decreases in accounts payable and accrued liabilities of $576,217.

In addition, cash flow used in operating activities from discontinued operations was $2,370,158 during the nine months ended May 31, 2011, primarily due to loss from operations.

Total cash flow used in operating activities for continuing and discontinued operations combined was $1,562,640 during the nine months ended May 31, 2011.

Cash flows from investing activities

Cash flow used in investing activities for continuing activities was $1,266,052 primarily due to the purchase of trading securities of $5,330,795 and related sales of $4,064,743. As of May 31, 2011, the Company is holding certain trading securities with a fair market value of $1,295,519. The cost of these securities was $1,415,664.

In addition, cash flow used in investing activities for discontinued operations was $109,183 towards purchase of equipment.

Total cash flow used in investing activities for continuing and discontinued operations combined was $1,375,235 during the nine months ended May 31, 2011.

Cash flows from financing activities

Cash flow used in financing activities for continuing activities was $3,490. In September 2010, the Company borrowed $65,000 as note payable from a financial institution at an interest rate of 6%. This note payable is to be repaid in 24 monthly installments and is secured by specific equipment purchased at our Pasadena facility. The Company has paid $20,834 during the nine months ended May 31, 2011 towards this note payable. In addition, the Company paid $47,656 towards a mortgage loan for the purchase of an apartment in Hong Kong.

In addition, cash flow used in financing activities for discontinued operations was $99,681 towards payments on capital leases of equipment.

Total cash flow used in financing activities for continuing and discontinued operations combined was $103,171 during the nine months ended May 31, 2011.

The Company had working capital of $26,098,417 as of May 31, 2011 and maintained a liquid position by a current ratio of approximately 2.3 to 1.

We believe we will be able to meet our ongoing liquidity and cash needs for fiscal year 2011 through the combination of available cash and cash flow from operations.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance related to fair value disclosure requirements. The new guidance resulted in a change in the Company’s accounting policy effective March 1, 2010. Under this guidance, companies will be required to make additional disclosures concerning significant transfers of amounts between the Level 1 and Level 2 fair value disclosures, as well as further disaggregation of the types of activity that were previously disclosed in the rollforward of Level 3 fair value disclosures. Further, the guidance clarifies the level of aggregation of assets and liabilities within the fair value hierarchy that may be presented. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued new accounting guidance concerning measuring liabilities at fair value, which resulted in a change in the Company’s accounting policy effective September 1, 2009. The new accounting guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain valuation techniques. Additionally, it clarifies that a reporting entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability. The adoption did not have a significant impact on the Company’s consolidated financial statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4.

Controls and Procedures.

Under the supervision and with the participation of our management, including our chief executive officer and chief 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 chief executive officer and chief financial officer concluded that, as of May 31, 2011, our disclosure controls and procedures were effective.

There have been no significant changes in our internal control over financial reporting during the most recently completed fiscal quarter or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

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 “Revenue Recognition” – “Discontinued Operations – (U.S. Hospitals)” – “Contractual Allowance” within the Notes to Consolidated Financial Statements of this Form 10-Q for a detailed description of the MDR process and related pending litigation, which description is incorporated herein by reference. The Company cannot predict whether any litigation or administrative proceeding to which it is currently a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

Item 1A.

Risk Factors.

The Company’s Risk Factors as disclosed in its Form 10-K for the year ended August 31, 2010 have not materially changed.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

(Removed and Reserved).

Item 5.

Other Information.

Entry into a Material Definitive Agreement

On July 7, 2011 the Company, acting through its wholly owned subsidiary, Doctors Practice Management, Inc. (“DPM”), entered into a definitive Common Stock Purchase Agreement to acquire minority membership interests in CCM&D Consulting, L.L.C. (“CCM&D”) and GreenTree Administrators, L.L.C. (“GreenTree”). Additionally, DPM entered into a Management and Consulting Agreement with CCM&D for the establishment and operation of a series of medical clinics in the southern United States area. The principal of CCM&D, a clinic management company, and GreenTree, a third party administrator contracted by self-funded employees’ health care programs sponsored by employers, is Dr. Garry Craighead. CCM&D currently operates four clinics in Texas under the name Union Treatment Centers. The Company acquired a 15% and 40% membership interest in CCM&D and GreenTree, respectively. The Company purchased said interests with 125,000 shares of Dynacq Healthcare, Inc. common stock restricted pursuant to SEC Rule 144 as set forth in the Common Stock Purchase Agreement with CCM&D and GreenTree.

pursuant to the Company’s Year 2000 Stock Incentive Plan, and the Company will pay Dr. Craighead an annual salary of $200,000. It will further grant Dr. Craighead an incentive stock option to purchase an additional 3,000,000 shares of common stock of the Company, upon shareholder approval. Both the Year 2011 Stock Incentive Plan and the grant of the incentive stock option to purchase an additional 3,000,000 shares have been approved by the Board of Directors and the Compensation Committee, but are subject to approval by the shareholders. The entire 4,500,000 stock option grants are performance awards attributable to his efforts. Specifically, 15,000 shares will vest based on the employee’s obtainment of each $1,000,000 of net collections for the Company, up to the maximum of 4,500,000 shares over five years.

Unregistered Sale of Equity Securities

As described above, on July 7, 2011, the Company issued to Dr. Craighead (i) 125,000 shares of common stock in consideration for the membership interests in CCM&D and GreenTree pursuant to the Common Stock Purchase Agreement and (ii) 125,000 shares of common stock and an incentive stock option to purchase 1,500,000 shares of common stock as compensation for his employment as Chief Development Officer, with an incentive stock option for an additional 3,000,000 shares to be issued to him upon shareholder approval. Both incentive stock options expire in five years, have an exercise price equal to the closing stock price of the Company on the date of grant and have a vesting schedule tied to Dr. Craighead’s job performance. Specifically, 15,000 shares will vest based on the employee’s obtainment of each $1,000,000 of net collections for the Company attributable to his efforts, up to the maximum of 4,500,000 shares over five years.

The Company issued the securities to Dr. Craighead under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder. The issuances of securities did not involve a “public offering” based upon the following factors: (i) the issuances of the securities were part of an isolated private transaction; (ii) a limited number of securities was issued to a single offeree; (iii) there was no public solicitation; (iv) the investment intent of the offeree; and (v) the restriction on transferability of the securities issued.

Item 6.

Exhibits.


EXHIBIT NO.		IDENTIFICATION OF EXHIBIT
+Exhibit 10.1		Employment Agreement dated July 7, 2011 with Dr. Garry Craighead.

+Exhibit 10.2		Notice of Grant of Stock Option dated July 7, 2011 to Dr. Garry Craighead.

Exhibit 10.3		Common Stock Purchase Agreement dated July 7, 2011 to acquire minority membership interests in CCM&D Consulting, L.L.C., and GreenTree Administrators, L.L.C.

Exhibit 10.4		Management and Consulting Agreement dated July 7, 2011 with CCM&D Consulting, L.L.C.

Exhibit 15.1		Awareness Letter of Killman, Murrell & Company, P.C.

Exhibit 23.1		Consent of Killman, Murrell & Company, P.C.

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.

SIGNATURES

Pursuant to the requirements 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: July 13, 2011	By:	/s/ Chiu M. Chan
		Chiu M. Chan
		Chief Executive Officer
		(duly authorized officer)

Date: July 13, 2011	By:	/s/ Philip S. Chan
		Philip S. Chan
		Chief Financial Officer
		(principal financial and accounting officer)

INDEX OF EXHIBITS


EXHIBIT NO.		IDENTIFICATION OF EXHIBIT
+Exhibit 10.1		Employment Agreement dated July 7, 2011 with Dr. Garry Craighead.

+Exhibit 10.2		Notice of Grant of Stock Option dated July 7, 2011 to Dr. Garry Craighead.

Exhibit 10.3		Common Stock Purchase Agreement dated July 7, 2011 to acquire minority membership interests in CCM&D Consulting, L.L.C., and GreenTree Administrators, L.L.C.

Exhibit 10.4		Management and Consulting Agreement dated July 7, 2011 with CCM&D Consulting, L.L.C.

Exhibit 15.1		Awareness Letter of Killman, Murrell & Company, P.C.

Exhibit 23.1		Consent of Killman, Murrell & Company, P.C.

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.

EX-10.1 2 dex101.htm EMPLOYMENT AGREEMENT Employment Agreement

Exhibit 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement (“Employment Agreement”) is entered into on July 7, 2011, but made effective as of July 1, 2011, (“Effective Date”) by and between Dynacq Healthcare, Inc., a Nevada corporation with offices located at 10304 Interstate 10 East, Suite 369, Houston, Texas 77029 (the “Company”), and Dr. Garry Craighead an individual with offices located at 8900 Shoal Creek Blvd., Bldg. #200, Austin, Texas 78757 (“Employee”).

WHEREAS, the Company desires to enter into an employment relationship with the Employee upon the terms and conditions set forth in this Employment Agreement and the Employee wishes to accept such employment relationship upon the terms and conditions set forth in this Employment Agreement

NOW, THEREFORE, in consideration of and in reliance upon the foregoing and the covenants, obligations and agreements contained herein, the Company and the Employee hereby agree as follows:

1. Position. The Employee will serve as the Company’s Chief Development Officer and will report to the Company’s Chief Executive Officer.

2. Employment Period. The Company will employ the Employee, and the Employee will serve the Company, under the terms of this Employment Agreement for the period commencing upon the Effective Date. The period of time between the Effective Date and the termination of the Employee’s employment hereunder shall be collectively referred to herein as the “Employment Period.”

3. Duties and Status. During the Employment Period, the Employee shall perform such duties as are normally performed by this position, and will be responsible for special projects as may be requested by the Chief Executive Officer from time to time. The Employee agrees to abide by all by-laws and policies of the Company promulgated from time to time by the Company. The Employee agrees to devote so much of his business time, efforts and skills as required for the effective performance of his duties and responsibilities under this Employment Agreement.

4. Compensation and Employee Benefits.

(a) Base Salary. During the Employment Period, Employee shall receive a salary (“Salary”), payable pursuant to the Company’s normal payroll procedures in place from time to time, at the rate of $200,000 annualized, less all necessary and required federal, state and local payroll deductions. Employee may be eligible to receive annual salary increases as may be determined from time to time by the Chief Executive Officer.

(b) Options. Employee shall be granted an incentive stock option to purchase 1,500,000 shares of common stock of the Company pursuant to the Dynacq Healthcare, Inc., 2000 Stock Incentive Plan which is a qualified stock option plan (“Option Shares”). The granting

of incentive stock options to purchase an additional 3,000,000 shares of common stock of the Company is subject to the adoption of a new incentive stock option share plan by the Board of Directors and Compensation Committee’s approval and contingent on subsequent shareholders’ approval of both the new incentive stock option plan and the issuance of 3,000,000 stock option shares from the new incentive option plan, the Company shall deliver to Employee, a Notice of Grant of Stock Option and Stock Option Agreement issued by Company for Employee’s acceptance and execution. These Option Shares shall be granted by the Board of Directors with an exercise price equal to the closing stock price at the end of the date of grant, with a five (5) year life and vest as herein outlined. The Option Shares shall vest to Employee quarterly according to the financial performance of the Employee based on fifteen thousand (15,000) option shares that shall vest for each $1,000,000 of net collections received by Company attributable to Employee’s efforts. “Net collections” are defined as money actually received by the Company and deposited in the bank. Net collections are “attributable to Employee’s efforts” when they are received as a result of medical procedures brought by Employee to the Company from GreenTree Administrators, L.L.C., Union Treatment Centers, and CCM&D Consulting, L.L.C., and other identifiable sources. The vesting schedule shall state that no later than 45 days after the end of each quarter with the first quarterly vesting being on July 15, 2011 and vesting continuing thereafter for a period of five years with the last quarterly vesting being on July 15, 2016. The vesting of the Option Shares shall be calculated based on each $1,000,000 of net collections received by Company attributable to Employee’s efforts beginning on April 15, 2011 as follows:

(i)

Fifteen Thousand (15,000) Option Shares shall vest for each $1,000,000 of net collections received by Company attributable to Employee’s efforts beginning on April 15, 2011.

(c) Compensation Upon Execution. Company shall transfer to Employee as additional compensation for the execution of this Agreement a total of One Hundred Twenty-five Thousand (125,000) shares of fully paid Company common stock to be transferred to Employee within thirty (30) working days of execution of this Agreement in the name of Garry Craighead.

(d) Benefits.

(i)

During the Employment Period, Employee shall be invited to participate in such insurance, disability and health and medical benefits and be invited to participate in such retirement plans or programs as are from time to time generally made available to similarly situated employees of the Company pursuant to the policies of the Company; and provided further that, Employee shall be required to comply with the conditions attendant to coverage by such plans and shall comply with and be entitled to benefits only in accordance with the terms and conditions of such plans. The Company may withhold from any benefits payable to Employee all federal, state, local and other taxes and amounts as shall be permitted or required to be withheld pursuant to any applicable law, rule or regulation.

(ii)

Employee shall be entitled to receive two (2) weeks of paid time off per calendar year in accordance with the Company’s policies, which shall be taken at such time or times as shall be mutually agreed upon with the Chief Executive Officer.

(e) Business Expense Reimbursement. The Company shall reimburse the Employee for all pre-approved reasonable business expenses incurred by the Employee during the Employment Period for promoting the Company’s business, including expenses for entertainment, travel and similar items, upon the Employee’s timely presentation of an itemized account with receipts of such expenditures, in accordance with the Company’s business expense reimbursement policy.

5. Deleted.

6. Termination. Employment with the Company is at-will employment, for no specific period of time. Either the Company or the Employee may terminate this Employment Agreement and the Employee’s employment at any time for any reason upon written notice to the other. Upon any termination of this Employment Agreement, the Employment Period and all rights and entitlements of the Employee pursuant to this Employment Agreement (including further stock options) shall forthwith cease and terminate, and the Company shall have no liability or obligations whatsoever to the Employee, except as provided for in Section 7(a) or Section 7(b) hereof.

7. Severance.

(a) Termination for Cause. The Company may terminate this Employment Agreement and the Employee’s employment at any time for “Cause” (as defined below). If the Company terminates Employee’s employment for Cause then (i) the Company’s obligations (including further stock options) under this Agreement shall immediately cease, and (ii) Employee shall not be entitled to receive payment of, and the Company shall have no obligation to pay, any severance or similar compensation attributable to such termination, other than the portion of Employee’s Salary and bonus program (if any) then earned but unpaid.

(b) Severance for Involuntary Termination. Despite the at-will employment relationship between Employee and Company, if Employee’s employment is terminated by the Company without Cause, then, contingent upon Employee’s execution (and non-revocation) of a severance agreement in a form reasonably acceptable to the Company which contains, among other things, a full and complete general release of and covenant not to sue the Company in the form attached hereto as Exhibit A, Company shall pay to Employee severance. The severance amount shall be equal to one month of pay for each full year Employee is employed by Company under the terms of this Agreement.

(c) Cause. “Cause” means a termination of the Employee’s employment by the Company attributed to (i) Failure to achieve the following annual goals for net collections received by the Company attributable to the Employee’s efforts in each of the respective twelve-month time periods from the date of employment:


Months after date of employment	Total annual collections goal

Months 1-12	$	22,000,000

Months 13-24	$	32,000,000

Months 25-36	$	36,800,000

Months 37-48	$	42,320,000

Months 49-60	$	48,668,000;

or (ii) Employee’s failure to perform his duties hereunder to the reasonable satisfaction of the Chief Executive Officer, or failure to follow the directives of the Chief Executive Officer or (iii) Employee’s engaging in misconduct or negligent conduct, or (iv) the material breach by Employee of any written covenant or agreement with the Company under this Agreement, or otherwise.

(d) Deleted.

8. Miscellaneous.

(a) Withholding Tax. All payments required to be made by the Company to the Employee under this Employment Agreement shall be subject to the withholding of such amounts relating to tax (including federal and state income tax and withholdings, employment tax and withholdings, and excise tax) and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation.

(b) Waiver. Failure of the Company at any time to enforce any provision of this Employment Agreement or to require performance by the Employee of any provisions hereof shall in no way affect the validity of this Employment Agreement or any part hereof or the right of the Company thereafter to enforce its rights hereunder; nor shall it be taken to constitute a condonation or waiver by the Company of that default or any other or subsequent default or breach.

(c) Notices. All notices or other communications hereunder shall not be binding on either party hereto unless in writing, and delivered to the other party thereto at the following address:


If to the Company:		Dynacq Healthcare, Inc. 10304 Interstate 10 East Suite 369 Houston, Texas 77029 Attn: Chiu M. Chan CEO

If to the Employee:		Dr. Garry Craighead 8900 Shoal Creek Blvd. Bldg. # 200 Austin, Texas 78757

With a copy to:

Don B. Mauro

Attorney at Law

2301 Tower Drive

Austin, Texas 78703

Notices shall be deemed duly delivered upon hand delivery thereof at the above addresses, one day after deposit with a nationally recognized overnight delivery company, or three days after deposit thereof in the United States mails, postage prepaid, certified or registered mail. Either party may change its address for notice by delivery of written notice thereof in the manner provided.

(d) Assignment. Except as set forth herein, no rights of any kind under this Employment Agreement shall, without the prior consent of the Company, be transferable to or assignable by the Employee or any other person, or, except as provided by applicable law, be subject to alienation, encumbrance, garnishment, attachment, execution or levy of any kind, voluntary or involuntary. This Employment Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns.

(e) Severability. If any provision of this Employment Agreement is held to be unenforceable for any reason, such provision and all other related provisions shall be modified rather than voided, if possible, in order to achieve the intent of the parties to this Employment Agreement to the extent possible. In any event, all other unrelated provisions of this Employment Agreement shall be deemed valid and enforceable to the fullest extent.

(f) Governing Law. This Employment Agreement shall be governed by and construed in accordance with the substantive laws of the state of Texas, without regard to the conflicts of law principles thereof. Venue for any legal actions hereunder shall be in the state district courts of Harris County, Texas.

(g) Counterparts. This Employment Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same document.

(h) Headings. The headings in this Employment Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

Entire Agreement. THE PARTIES HERETO ACKNOWLEDGE THAT THEY HAVE READ THIS EMPLOYMENT AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS. This Employment Agreement which is deemed to be incorporated herein) constitutes the entire understanding and agreement between the parties hereto concerning the subject matter hereof. All negotiations by the parties hereto concerning the subject matter hereof are merged into this Employment Agreement, and there are no representations, warranties, covenants, understandings or agreements, oral or otherwise, in

relation thereto by the parties hereto other than those incorporated herein. No supplement modification or amendment of this Employment Agreement shall be binding unless executed in writing by the parties hereto.

SIGNATURE PAGE TO FOLLOW

SIGNATURE PAGE OF CRAIGHEAD EMPLOYMENT AGREEMENT

INTENDING TO BE LEGALLY BOUND, the parties or their duly authorized representatives have signed this Employment Agreement as of the date first above written.

Exhibit A

SEVERANCE AGREEMENT

This Severance Agreement (this “Agreement”) is entered into between Dynacq Healthcare, Inc., together with its affiliates (collectively “Company”) and Garry Craighead (“Employee”). Company and Employee desire to resolve completely and forever all differences between them. In consideration of the mutual promises set forth below, Company and Employee agree as follows:

1. SEVERANCE. If Employee executes and does not revoke this Agreement and promptly returns it to Company, Company agrees to pay Employee the severance described in Section 7 of Employee’s Employment Agreement with Company dated July 7, 2011, but made effective as of July 1, 2011 (the “Employment Agreement”).

2. COMPLETE RELEASE. Employee hereby releases Company and any affiliated companies, along with the employees, partners, agents, directors, officers, and attorneys of any of them, (the “Releasees”) from any and all claims or demands, which Employee may have or claim to have against any of them. This complete release of all claims includes but is not limited to a complete release of any claims (including claims for attorneys’ fees) Employee may have or claim to have based on Employee’s employment with Company or the termination of that employment, including but not limited to any claims under the Employment Agreement, as well as any claims arising out of any contract, express or implied, any covenant of good faith and fair dealing, express or implied, any tort (including negligence by Company or anyone else), and any federal, state or other governmental statute, regulation or ordinance relating to employment, employment discrimination, or the payment of wages or benefits, including but not limited to the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964 (as amended), the Americans with Disabilities Act, the Employee Retirement Income Security Act, the Family Medical Leave Act, and the Age Discrimination in Employment Act. Provided, however, that Employee is not releasing any claims Employee may have under the Age Discrimination in Employment Act that may arise after this Agreement is executed.

3. INSTITUTING PROCEEDINGS. Employee agrees not to file any lawsuit based on claims described in Section 2. Employee agrees that the consideration described in Section 1 of this Agreement is being provided in exchange for Employee’s agreement not to file any lawsuit based on any claims released by the terms of Section 2. If Employee files any lawsuit based on any claims released by the terms of Section 2, Employee will: (a) immediately return or refund to Company the monetary payment(s) described in Section 6(b) of the Employment Agreement; (b) immediately take any and all actions necessary to effectuate the immediate withdrawal and/or dismissal of the lawsuit; and (c) in the event the Employee does not receive a judgment in his favor he shall pay Company and the other Releasees for any and all reasonable attorney’s fees and costs any and/or all of them incur as a result of or in connection with the lawsuit.

4. NON-ADMISSION OF LIABILITY. By entering into this Release, neither party admits that they have done anything wrong.

5. SEVERABILITY. In executing this Agreement, Employee is not relying on any promises not contained in this Agreement. The provisions contained herein are severable and the invalidity of any provision shall not affect the enforceability of any other provision. If any provision in this Agreement shall be held to be invalid, illegal or unenforceable, the provision shall be stricken and the remainder of this Agreement shall remain valid and enforceable.

6. AGREEMENT TO BE BINDING ON OTHERS. This Agreement will be binding upon Employee and Company and their respective heirs, administrators, trustees, representatives, executors, successors, and assigns.

7. CHOICE OF LAW, VENUE, MODIFICATION, AND EXECUTION. This Agreement will be construed in accordance with and governed by the laws of the State of Texas. Employee and Company agree that the exclusive venue for any dispute involving this Agreement, the claims described in Section 2, Employee’s employment with Company, or the termination of that employment shall be Houston, Harris County, Texas. Employee understands that once this Agreement is executed, only the Board of Directors of Company will have the authority to modify this Agreement on behalf of Company, and that the Board will have such authority only when acting in writing. In this connection, the parties agree that this Agreement will not be modified or amended except by a written instrument(s), signed by both parties, with the Chairman of the Board signing for Company. This Agreement may be executed in multiple parts.

8. ARBITRATION. Deleted.

9. CONFIDENTIALITY. Employee agrees to keep the existence and terms of this Agreement confidential. Notwithstanding the foregoing, Employee may disclose the existence of terms of this Agreement to her spouse, tax advisor, and attorney; provided, however, that Employee first secures the agreement of Employee’s spouse, tax advisor, and/or attorney (as applicable) to be bound by the foregoing confidentiality obligation.

10. REVIEW. Employee understands that Employee has twenty-one (21) days from the date this Agreement was first presented to Employee in which to review and consider this Agreement before signing it, and that Employee may use as much or as little of this 21-day period as Employee wishes. Employee is encouraged to consult an attorney before signing this Agreement. By executing this Agreement, Employee acknowledges that Employee was afforded a period of at least 21 days from the date this Agreement was first presented to Employee in which to consider it. Employee agrees that any changes Employee and Company may make to this Release, whether material or not, will not restart the 21-day period described in this Section 10.

11. REVOCATION. If Employee decides to accept and sign this Agreement, Employee will have seven (7) days in which to revoke Employee’s release of claims under the Age Discrimination in Employment Act. Employee understands that Employee’ release of claims under the Age Discrimination in Employment Act will not become effective or enforceable until the seven (7) days have elapsed without Employee having revoked Employee’s release of those claims. Employee understands that any such revocation will not be effective unless Employee delivers a written notice of such revocation to Company, no later than close of business on the seventh day after Employee signs this Agreement.

I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THE FOREGOING AGREEMENT, THAT I UNDERSTAND ALL OF ITS TERMS, THAT I UNDERSTAND THAT IT CONTAINS A COMPLETE RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS, AND THAT I AM ENTERING INTO IT VOLUNTARILY.

Garry Craighead

(“Employee”)

ACCEPTED AND AGREED:


Dynacq Healthcare, Inc.

By:

Title:

Date:

EX-10.2 3 dex102.htm NOTICE OF GRANT OF STOCK OPTION Notice of Grant of Stock Option

Exhibit 10.2

DYNACQ HEALTHCARE, INC.

NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the “Option”) to purchase shares of the Common Stock of Dynacq Healthcare, Inc. (the “Corporation”):


Optionee:		Garry Craighead

Grant Date:		July 7, 2011
		(as to 1,500,000 shares)

Initial Vesting Date:		July 15, 2011

Exercise Price:		$1.86 (closing price at the date of grant)
		(as to 1,500,000 shares)

Number of Option Shares: 1,500,000 from the 2000 Incentive Stock Option Plan ; 3,000,000 from new incentive stock option plan to be adopted by the Board of Directors and the Compensation Committee’s approval, and contingent on subsequent shareholders’ approval of both the new incentive stock option plan and the issuance of 3,000,000 stock option shares from the new incentive stock option plan. The exercise price will be the closing share price at the date of grant of the 1,500,000 shares. The exercise price for the 3,000,000 shares will be the closing share price on the date of grant.

Expiration Date: 5 Years from the Grant Date (listed above) unless terminated pursuant to the 2000 Stock Incentive Plan, attached hereto as Exhibit C, or the Stock Issuance Agreement, attached hereto as Exhibit B.

Type of Option: Incentive Stock Option

Vested Shares: Except as provided in the Stock Option Agreement, the number of Vested Shares (disregarding any resulting fractional share) as of any date shall vest to Optionee quarterly based on the financial performance of Company attributable to Employee’s efforts. The vesting schedule shall state that no later than 45 days after the end of each quarter with the first quarterly vesting being on July 15, 2011 and vesting continuing thereafter for a period of five years with the last quarterly vesting being on July 15, 2016. The vesting of the Option Shares shall be calculated based on each $1,000,000 of net collections received by Company attributable to Employee’s efforts beginning on April 15, 2011 as follows:

(i)

Fifteen Thousand (15,000) Option Shares shall vest for each $1,000,000 of net collections received by Company attributable to Employee’s efforts beginning on April 15, 2011. “Net collections received” are defined as money actually received by the Company and deposited in the bank. Net collections are “attributable to Employee’s efforts” when they are received as a result of medical procedures brought by Employee to the Company from GreenTree Administrators, L.L.C., Union Treatment Centers, and CCM&D Consulting, L.L.C., and other identifiable sources.

No Impairment of Rights. Nothing in this Notice or in the attached Stock Option Agreement shall interfere with or otherwise restrict in any way the rights of the Corporation to remove Optionee from employment with the Corporation at any time in accordance with the provisions of applicable law.

Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this notice or in the attached Incentive Stock Option Agreement.

Exercise Price. The Exercise Price represents an amount the Company believes to be no less than the fair market value of a share of Stock as of the Date of Grant, determined in good faith based upon the requirements of Section 409A of the Code. However, there is no guarantee that the Internal Revenue Service will agree with the Company’s determination. A subsequent IRS determination that the Exercise Price is less than such fair market value could result in adverse tax consequences to the Participant. By signing below, the Optionee agrees that the Company, its directors, officers and stockholders shall not be held liable for any tax, penalty, interest or cost incurred as a result of such determination by the IRS. The Optionee is urged to consult with his or her own tax advisor regarding the tax consequences of the Option, including the application of Section 409A.

Exercise of Stock Option. Optionee or Employee has 90 days to exercise his or her vested options upon termination or resignation. Otherwise, the unexercised vested options will expire after 90 days from the date of termination or resignation.

Acknowledgement. By their signatures below, the Corporation and the Optionee agree that the Option is governed by this Notice and by the provisions of the Plan and the Stock Option Agreement, both of which are attached to and made a part of this document. The Optionee acknowledges receipt of a copy of the Plan, the Stock Issuance Agreement, and the Stock Option Agreement, represents that the Optionee has read and is familiar with their provisions, and hereby accepts the Option subject to all of their terms and conditions.

Executed on July 7, 2011.

DYNACQ HEALTHCARE, INC.

/s/ Chiu M. Chan

Chiu M. Chan

Chief Executive Officer

10304 Interstate 10, Suite 369

Houston, Texas 77029

OPTIONEE

/s/ Garry Craighead

Garry Craighead

Date: July 7, 2011

Address: 8900 Shoal Creek Blvd., Bldg. # 200

Austin, Texas 78757

EX-10.3 4 dex103.htm COMMON STOCK PURCHASE AGREEMENT Common Stock Purchase Agreement

Exhibit 10.3

DYNACQ HEALTHCARE, INC.

COMMON STOCK PURCHASE AGREEMENT

THIS COMMON STOCK PURCHASE AGREEMENT (this “Agreement”) is made as of the 7th day of July, 2011, by and among Dynacq Healthcare, Inc., a Nevada corporation, acting through its wholly owned subsidiary Doctors Practice Management, Inc. a Texas corporation (the “Company”), and Garry Craighead (“Purchaser”), the sole member and manager of GreenTree Administrators, L.L.C. (“GreenTree”) and CCM&D Consulting, L.L.C. (“CCM&D”).

THE PARTIES HEREBY AGREE AS FOLLOWS:

ARTICLE 1

PURCHASE AND SALE OF STOCK

1.1. Authorization of Stock. On or prior to the Closing, the Company shall have authorized the sale and issuance to the Purchaser shares of the Company’s Common Stock (the “Common Stock”). On or prior to the Closing, the Purchaser shall have authorized the sale and issuance to the Company Membership units of GreenTree and CCM&D (the “LLC Units”)

1.2. Purchase and Sale of Common Stock. Subject to the terms and conditions of this Agreement, Purchaser agrees to purchase at the Closing (as defined below) and the Company agrees to sell and issue to Purchaser at the Closing, One Hundred Twenty-five Thousand shares of the Company’s Common Stock. As consideration for the purchase price Purchaser shall transfer to Doctors Practice Management, Inc., a Texas corporation and wholly owned subsidiary of Company a sufficient number of membership units to represent an ownership interest in Forty percent (40%) of the total outstanding LLC Units in GreenTree and Fifteen percent (15%) of the total outstanding LLC Units in CCM&D.

1.3. Closing. The initial purchase by, and sale of Shares to, the Purchasers shall take place at the offices of Company at 10:00 a.m. Central Time on July 7, 2011, or at such other time and place as the Company and the Purchasers representing a majority of the Shares being purchased at such time mutually agree upon in writing (“Closing”).

1.4. Delivery. At the Closing, the Company shall deliver to Purchaser a certificate representing the duly issued Shares that Purchaser is purchasing, and Purchaser shall deliver to Company the documentation from Greentree and CCM&D representing the transfer of LLC Units to Company.

Common Stock Purchase Agreement

Dynacq Healthcare, Inc.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to Purchaser that, as of the Closing:

2.1. Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and the is in compliance with all the requirements of the Securities and Exchange Commission, and has all requisite corporate power and authority to carry on its business as now conducted and as currently proposed to be conducted.

2.2. Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the other documents executed simultaneously with this Agreement, the performance of all obligations of the Company hereunder and thereunder, the authorization, issuance (and reservation for issuance), and the sale and delivery of the Shares being sold hereunder for the consideration provided herein, has been taken, and this Agreement and the documents executed simultaneously with this Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

2.3. Valid Issuance of Common Stock. The Shares being purchased by the Purchasers hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of any encumbrances, preemptive rights or restrictions on transfer other than restrictions on transfer under this Agreement and the documents executed simultaneously with this Agreement and under applicable laws.

2.4. Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing on the part of the Company with any federal, state or local governmental authority or any other person or entity is required in connection with the consummation of the transactions contemplated by this Agreement or the documents executed simultaneously with this Agreement, except applicable federal and state securities filings, which filings will be timely made.

2.5 Brokers The Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

Purchaser hereby represents and warrants that:

3.1. Organization, Good Standing and Qualification GreenTree and CCM&D are limited liability companies duly organized, validly existing and in good standing under the laws of the State of Texas, and have all requisite power and authority to carry on its business as now conducted and as currently proposed to be conducted. Authorization All action on the part of GreenTree and CCM&D, its managers, and members necessary for the authorization, execution

Common Stock Purchase Agreement

Dynacq Healthcare, Inc.

and delivery of this Agreement and the Ancillary Agreements, the performance of all obligations of GreenTree and CCM&D hereunder and thereunder, the authorization, issuance, and the sale and delivery of the LLC Units being transferred hereunder for the consideration provided herein, has been taken, and this Agreement and the Ancillary Agreements constitute valid and legally binding obligations of GreenTree and CCM&D, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

3.3. Valid Issuance of Common Stock The LLC Units being transferred to Company by the Purchaser hereunder, when issued, and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of any encumbrances, preemptive rights or restrictions on transfer other than restrictions on transfer under this Agreement and the Ancillary Agreements and under applicable securities laws.

3.4. Consents No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing on the part of the Company with any federal, state or local governmental authority or any other person or entity is required in connection with the consummation of the transactions contemplated by this Agreement or the Ancillary Agreements, except applicable federal and state securities filings, which filings will be timely made.

Subject to customary exceptions, all the LLC Units owned by Company shall be entitled to broad-based, weighted-average dilution protection if GreenTree or CCM&D issue additional equity securities at a purchase price less than the current market price.

Subject to customary exceptions, Company shall have preemptive rights to acquire his pro rata share of any equity securities proposed to be issued by Greentree or CCM&D. This right shall be calculated based on and include all of the LLC Units owned by Company. Brokers Purchaser has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement.

3.5 Left blank intentionally.

3.6. No Obligations. There is no obligation to repurchase, re-acquire, or redeem any of the membership interest, nor are there any outstanding securities convertible into or evidencing the right to purchase or subscribe for any membership interest.

3.7. Ownership. Purchaser is the owner in fee simple of all of the membership units being conveyed hereby.

3.8. Dynacq Shares. Purchaser is acquiring the shares of Dynacq stock for investment purposes, and he understands that the shares have not been registered and that there will be a restrictive legend on the stock certificates. Purchaser has had access to financial information about Dynacq, and Purchaser is an accredited investor.

Common Stock Purchase Agreement

Dynacq Healthcare, Inc.

3.9 Pending claims. There are no pending claims and there is no current litigation against GreenTree and CCM&D.

3.10 Compliance issues. There are no pending transactions relating either to GreenTree or to CCM&D of which Purchaser is aware or has been notified that would cause either entity to be out of compliance with any applicable laws or regulations.

3.11. No Defaults. Neither GreenTree nor CCM&D is in default as to any agreements to which it is a party.

3.12. Indemnification. Purchaser hereby agrees to indemnify Dynacq and hold it harmless for any liabilities relating to GreenTree or CCM&D which have not been disclosed at the time of the Closing.

ARTICLE 4

CLOSING CONDITIONS

4.1. Conditions of Purchasers’ Obligations at Closing The obligations of Purchaser and Company under ARTICLE 1 with respect to Closing hereunder is subject to the fulfillment on or before the Closing of each of the following conditions:

(a) Representations and Warranties. The representations and warranties of the Company contained in ARTICLE 2, and ARTICLE 3 in all material respects, shall be true on and as of the Initial Closing with the same effect as if such representation and warranties had been made on and as of the date of the Closing.

(b) Performance. The Company and Purchaser shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing.

(c) Waivers and Consents. The Company and Purchaser shall have obtained all consents and waivers necessary or advisable to execute and deliver the Ancillary Agreements, and issue and deliver the Shares and LLC Units, and all such consents and waivers shall be in full force and effect.

(d) Other Documents. All other documents executed simultaneously with this Agreement have been executed by the parties including the Employment Agreements between Company and Dr. Garry Craighead and Ben Johnson, the Adoption Agreement for GreenTree and CCM&D, and the CCM&D Development Agreement.

Common Stock Purchase Agreement

Dynacq Healthcare, Inc.

ARTICLE 5

MISCELLANEOUS

5.1. Survival of Warranties The warranties, representations and covenants of the Company and Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing.

5.2. Governing Law This Agreement shall be governed by and construed under the laws of the State of Texas as applied to agreements among Texas residents entered into and to be performed entirely within Texas.

5.3. Venue All disputes and controversies arising out of or in connection with this Agreement or the transactions contemplated hereby shall be resolved exclusively by the state and federal courts located in the State of Texas, and each party hereto agrees to submit to the jurisdiction of said courts and agrees that venue shall lie exclusively with such courts.

5.4. Counterparts This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

5.5. Notices Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified, or one (1) day after deposit with a nationally recognized overnight courier specifying next day delivery or three (3) days after having been deposited with the Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days’ advance written notice to the other parties in the manner set forth above.

5.6. Severability If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

[SIGNATURES TO FOLLOW]

Common Stock Purchase Agreement

Dynacq Healthcare, Inc.

IN WITNESS WHEREOF, the parties have executed this Common Stock Purchase Agreement as of the date above written.


“COMPANY”

DYNACQ HEALTHCARE, INC., a Nevada corporation

By:		/s/ Philip Chan
Name:		Philip Chan
Title:		Chief Financial Officer



Address:	10304 Interstate 10 East
	Suite 369
	Houston, Texas 77029
	Phone:	713-378-2000
	Fax:	713-378-3155
	Email:	philipchan@dynacq.com

SIGNATURE PAGE

TO THE

COMMON STOCK PURCHASE AGREEMENT

FOR

DYNACQ HEALTHCARE, INC.


“PURCHASER”

GARRY CRAIGHEAD

/s/ Garry Craighead
Garry Craighead

Address:		8900 Shoal Creek Blvd.
		Bldg. # 200
		Austin, Texas 78757
		Phone: 512/323-6900
		Fax: 512/32306903
		Email: drgarryutc@aol.com

With a copy to:
		Don B. Mauro
		Attorney at Law
		2301 Tower Drive
		Austin, Texas
		Phone: (512) 657-0195
		Email: dmauro21@gmail.com

SIGNATURE PAGE

TO THE

COMMON STOCK PURCHASE AGREEMENT

FOR

DYNACQ HEALTHCARE, INC.


“GREENTREE”

GREENTREE ADMINISTRATORS, L.L.C.

/s/ Garry Craighead
Garry Craighead
Manager

Address:		8900 Shoal Creek Blvd.
		Bldg. # 200
		Austin, Texas 78757
		Phone: 512/323-6900
		Fax: 512/32306903
		Email: drgarryutc@aol.com

With a copy to:
		Don B. Mauro
		Attorney at Law
		2301 Tower Drive
		Austin, Texas
		Phone: (512) 657-0195
		Email: dmauro21@gmail.com

SIGNATURE PAGE

TO THE

COMMON STOCK PURCHASE AGREEMENT

FOR

DYNACQ HEALTHCARE, INC.


“CCM&D”

CCM&D CONSULTING, L.L.C.

/s/ Garry Craighead
Garry Craighead
Manager

Address:		8900 Shoal Creek Blvd.
		Bldg. # 200
		Austin, Texas 78757
		Phone: 512/323-6900
		Fax: 512/32306903
		Email: drgarryutc@aol.com

With a copy to:
		Don B. Mauro
		Attorney at Law
		2301 Tower Drive
		Austin, Texas
		Phone: (512) 657-0195
		Email: dmauro21@gmail.com

SIGNATURE PAGE

TO THE

COMMON STOCK PURCHASE AGREEMENT

FOR

DYNACQ HEALTHCARE, INC.

EX-10.4 5 dex104.htm MANAGEMENT AND CONSULTING AGREEMENT Management and Consulting Agreement

Exhibit 10.4

MANAGEMENT AND CONSULTING AGREEMENT

This Consulting Agreement (“Agreement”) is made and entered into as of the 7th day of July, 2011 by and between Doctors Practice Management, Inc., a Texas corporation (the “Company”), and CCM&D Consulting, L.L.C. (“Consultant”). The Company desires to retain Consultant as an independent contractor to perform consulting services for the Company, and Consultant is willing to perform such services, on terms set forth more fully below. In consideration of the mutual promises contained herein, the parties hereto (the “Parties”) agree as follows:

1. SERVICES AND COMPENSATION

(a) Consultant shall open no less than 10 new turnkey medical clinics or facilities per year for Company during the first year of this Contract. Consultant’s duties shall include securing a location, providing all capital build-out, as well as providing consulting and marketing for each new facility (“Services”).

(b) Company shall fund to Consultant up to Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in accordance with the budget approved by Company and Consultant for each new facility opened, in accordance with Schedule A attached hereto and incorporated herein. Company shall make periodic payments based upon the percentage of completion of the respective items listed in Schedule A. As each facility opens, Company shall enter into an exclusive management agreement with Consultant for the operations and management of the facilities.

2. OWNERSHIP Company or an affiliate shall own 100% of each facility. The facilities will be operated under the name of Union Treatment Center.

3. MANAGEMENT FEE

3.1 AMOUNT OF MANAGEMENT FEE. COMPANY agrees to pay a Management Fee to CONSULTANT in an amount equal to forty (40%) percent of the aggregate net operating profit for each clinic opened, if any. Net operating profit shall be the net revenue received by CONSULTANT less expenses within the operating budget for each clinic approved by COMPANY and CONSULTANT. The aggregate total operating profit (or loss) of all of the clinics shall be calculated for each month, and the Management Fee shall be calculated based on that number Either party, not more than four times in any twelve month period, upon giving notice to the other party hereto, shall have the right to inspect the records of CONSULTANT to ascertain and audit Revenues Collected, COMPANY’S Expenses, and CONSULTANT’s Expenses, subject to patient confidentiality laws. If the audit or examination discloses that the Management Fee was incorrectly computed or any expense improperly classified, the parties shall within twenty (20) days of such determination reconcile the difference by a cash payment to the applicable party. In all events, a reconciliation of the preceding year shall occur following the preparation of annual financial statements.

Page 1 of 20

3.2 PAYMENT OF MANAGEMENT FEE. The Management Fee will be paid in full by the 30th day of the month following each month that management services have been provided during the Term of this Agreement. Payment of the Management Fee is not intended to be, and shall not be, interpreted or applied as permitting CONSULTANT to share in COMPANY’s fees for Professional Services or any other services, but is acknowledged as the parties’ negotiated agreement as to the reasonable, fair market value of the support, services, personnel, management, administration, and other items and services furnished by CONSULTANT under this Agreement, considering the nature and volume of the services the risks assumed by CONSULTANT.

4. TERM AND TERMINATION

(a) Term. This Agreement will commence on the date first written above and shall continue for a period of one (_1_) year after which time it shall be automatically renewed for additional one (1) periods unless termination occurs as herein provided.

(b) Termination. Either Party may terminate this Agreement for any reason or no reason upon giving thirty (30) days prior written notice thereof to the other Party. Any such notice shall be addressed to the other Party at the address shown below and shall be deemed given upon delivery if personally delivered, or forty-eight (48) hours after deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested. Either Party may terminate immediately and without prior notice if the other Party is in breach of any material provision of this Agreement, but such termination shall not preclude any other legal or equitable remedy available to the terminating Party.

(c) Survival. Upon such termination of this Agreement, all rights and duties of the Parties toward each other shall cease except that the Company shall be obliged to pay, within thirty (30) days of the effective date of termination, all amounts owing to Consultant for Services completed and accepted by the Company prior to the termination date and related expenses, if any, in accordance with the provisions of Section 1 (“Services and Compensation”) hereof.

5. ASSIGNMENT

Neither this Agreement nor any right hereunder or interest herein may be assigned or transferred by Consultant without the express written consent of the Company.

6. INDEPENDENT CONTRACTOR

The express intention of the Parties is that Consultant is an independent contractor to the Company hereunder. Nothing in this Agreement shall in any way be construed to constitute Consultant as an agent, employee or representative of the Company, but Consultant shall perform the Services hereunder as an independent contractor. Consultant agrees to furnish (or reimburse the Company for) all tools and materials necessary to accomplish this contract, and shall incur all expenses associated

Page 2 of 20

with performance without reimbursement from the Company, except as expressly provided on Exhibit A of this Agreement. Consultant acknowledges and agrees that Consultant is obligated to report as income to all applicable taxing authorities all compensation received by Consultant pursuant to this Agreement, and Consultant agrees to and acknowledges the obligation to pay all self-employment and other taxes thereon. Consultant further agrees to indemnify and hold harmless the Company and its directors, officers, and employees from and against all taxes, losses, damages, liabilities, costs and expenses, including attorney’s fees and other legal expenses, arising directly or indirectly from (i) any negligent, reckless or intentionally wrongful act of Consultant or Consultant’s assistants, employees or agents, (ii) a determination by a court or agency that the Consultant is not an independent contractor, or (iii) any breach by the Consultant or Consultant’s assistants, employees or agents of any of the covenants contained in this Agreement.

7. BENEFITS

Consultant acknowledges and agrees and the Parties’ intent hereunder is that Consultant receives no Company-sponsored benefits from the Company either as a Consultant or an employee. Such benefits include, but are not limited to, paid vacation, sick leave, medical insurance, and 401(k) participation. If Consultant is reclassified by a state or federal agency or court as an employee, the Company may elect to have Consultant become a reclassified employee, receiving no benefits except those mandated by state or federal law, even if by the terms of the Company’s standard benefit plans in effect at the time of such reclassification Consultant would otherwise be eligible for such benefits.

8. OPERATION OF THE CLINICS. COMPANY and CONSULTANT mutually intend for this agreement to:

Facilitate consistency and efficiency of service in the medical care provided by COMPANY’s facilities at the Union Treatment Centers and in the administrative and business services provided by CONSULTANT, in accordance with the concept of Accountable Care Organizations;

Facilitate effective and efficient utilization of COMPANY’S resources;

Facilitate appropriate staffing and scheduling of personnel for and by CONSULTANT, as the case may be;

Facilitate the management and administration of the day-to-day business operations of CONSULTANT at the Union Treatment Centers;

Ensure that (1) the licensed health care personnel employed by COMPANY at Union Treatment Centers shall owe their first duty to their patients; and (b) preserve the confidential nature of the COMPANY-patient relationship (2) COMPANY’s personnel control patient care in the medical and administrative

Page 3 of 20

procedures to be followed; and (3) that CONSULTANT does not commit any act constituting the practice of medicine or use any licensed health care practitioners license to practice medicine all for the benefit of those seeking services as patients.

9. AUTHORITY

9.1 Deleted.

9.2 CONSULTANT. Consistent with the provisions of this Agreement, CONSULTANT shall have the responsibility and commensurate authority, under COMPANY’s supervision to provide full service management services for COMPANY at the clinics, including, equipment, supplies, support services personnel, billing and collection services, management, administration, financial record keeping and reporting, and other business office services as provided herein. CONSULTANT, subject to the ultimate control and direction of COMPANY, is hereby expressly authorized to provide all such services in any reasonable manner CONSULTANT deems appropriate to meet the day-to-day requirements of the business functions of COMPANY. To the extent practicable, CONSULTANT shall perform all of the services specified hereunder for COMPANY.

9.3 COMPANY. COMPANY, through licensed health care personnel, shall be solely responsible for and have sole and complete authority, supervision and control over the provision of professional and other related health care services performed for patients of COMPANY at the clinics. All diagnoses, treatments, procedures, and other professional health care services shall be provided and performed exclusively by or under the supervision of licensed health care personnel retained by COMPANY, as COMPANY, in its sole discretion, deems appropriate and in accordance with all laws. COMPANY’s healthcare personnel, will have the ultimate authority in the hiring and termination of all licensed clinic staff. COMPANY also has the right to request CONSULTANT to replace any CONSULTANT personnel assigned to the clinic. This Agreement shall in no way be construed to mean or suggest that CONSULTANT is engaged in the practice of medicine.

Page 4 of 20

10. COVENANTS OF CONSULTANT

10.1 Deleted.

10.1.1 RETENTION OF TITLE. Title to the clinics and all equipment shall at all times, be and remain in COMPANY.

10.1.2 REPAIR AND MAINTENANCE. CONSULTANT shall be responsible for the repair and maintenance of the clinics, and for the repair, maintenance, and replacement of all equipment located at the clinics.

10.1.3 Deleted.

10.1.4 Deleted.

10.2 Deleted.

10.3 Deleted.

10.4 Deleted.

10.5 Deleted.

10.6 Deleted.

10.7 PERSONNEL. CONSULTANT, subject to COMPANY’s right of approval as set forth in Schedule A, shall employ or otherwise retain, and shall be responsible for selecting, training, supervising, and terminating all management administrative, clerical secretarial bookkeeping, counseling, payroll, billing and collection, and other non-professional personnel as CONSULTANT deems reasonably necessary and appropriate for CONSULTANT’s performance of its duties and obligations under this Agreement. CONSULTANT shall have the sole responsibility for determining the salaries and fringe benefits of personnel retained by CONSULTANT, for paying such salaries and providing such fringe benefits, or for withholding, as required by law, any sums of income tax, unemployment insurance, social security, or any other withholding pursuant to any applicable law or governmental requirement.

Page 5 of 20

10.7.2 EXCLUSIVITY; NONCOMPETE AGREEMENT. This Agreement is exclusive as to CONSULTANT. During the term of this Agreement, the CONSULTANT shall not directly or indirectly, in any way for its own account, through its employees, agents, principals, partners, stockholders, corporate officers, directors, members or in other individual or representative capacity, engage or participate in any business that is in competition in any manner whatever with the business of COMPANY. Furthermore, upon the termination of this Agreement, for a period of 2 years thereafter, and within a 15 mile radius of the business, CONSULTANT and its representatives shall not:

Make known to any person, firm, or corporation the names and addresses of any of the patients or customers of Union Treatment Centers (“UTC”) that were patients of Union Treatment Centers at the time of termination of this Agreement and/or that were being serviced by Union Treatment Centers at the time of termination of this Agreement; or

Call on, solicit, or take away, or attempt to call on, solicit, or take away any of the patients or customers of UTC that were patients of the UTC before or at the time of termination of this Agreement and/or that were being serviced by UTC before or at the time of termination of this Agreement.

Engage in the provision of the services and duties described herein.

The parties recognize that the time restrictions set forth herein are reasonable and are not burdensome, and are properly allowed by law for the adequate protection of UTC. If such territorial or time restrictions or any other provision contained herein shall be deemed to be illegal, unenforceable or unreasonable by any court of competent jurisdiction, such territorial or time restriction or other provision shall be reduced by such court to such area or period as such arbitrator or court shall deem reasonable.

This section shall not be applicable to those clinics currently owned and operated by Consultant or an affiliate at the time of the execution of this Agreement.

The provisions of paragraph 10.7.2 are expressly stated to be ancillary to the remaining otherwise enforceable and binding obligations of the parties under this Agreement.

10.7.3 EQUAL EMPLOYMENT OPPORTUNITY. CONSULTANT shall abide and provide assistance to COMPANY, and abide by any and all applicable federal and/or state equal employment opportunity statutes, rules, and regulations, including, without limitation, Title VII of the Civil Rights Act of 1964, the Equal Employment opportunity Act of 1972, the Age Discrimination in Employment Act of 1967, the Equal Pay Act of 1963, the National Labor Relations Act, the Fair Labor standards Act, the Rehabilitation Act of 1973, and the occupational Safety and Health Act of 1970, all as may from time to time be modified or amended.

10.7.4 LABOR REPORTS. CONSULTANT shall appropriately prepare, maintain, and file all requisite reports and statements regarding unemployment insurance, social security, equal employment opportunity, or other reports and statements required with respect to personnel provided by CONSULTANT or COMPANY pursuant to this Agreement.

Page 6 of 20

10.8 CONSULTANTS. CONSULTANT shall render such business and financial management, consultation, and advice as may from time-to-time be requested by COMPANY in connection with the business operations of COMPANY and COMPANY’s provision of professional Services. In addition, CONSULTANT shall make available to COMPANY, for consultation and advice, to the extent available and as reasonably necessary, CONSULTANT’S specialists in such areas as accounting, auditing, budgeting, medical practice management, finance, law, government programs, housekeeping, insurance, management development, patient records, nursing, recruitment, quality assurance, systems and procedures, and third party reimbursement.

10.9 Deleted.

10.11 LICENSE TO USE TRADE NAMES AND TRADEMARKS OF CONSULTANT. CONSULTANT irrevocably grants to COMPANY license to use the name UNION TREATMENT CENTERS in connection with the provision of Professional Services in all clinics, including desirable color schemes, patterns, appearances, characteristics and words. COMPANY’S license to use any trademarks, trade names, service marks, insignia, slogans, emblems, symbols, designs or other identifying characteristics of UNION TREATMENT CENTERS shall survive the termination of this Agreement. CONSULTANT represents that at the time of entering this agreement it has the exclusive right and ownership to the use of the name UNION TREATMENT CENTERS. CONSULTANT will retain the right to use the name UNION TREATMENT CENTERS, but agrees that he will not license the use of the name UNION TREATMENT CENTERS to any nonaffiliated entity.

10.12 BILLING AND COLLECTION. On behalf of COMPANY and for the purpose of depositing all receipts arising from COMPANY’s Professional Services, CONSULTANT shall maintain a COMPANY’S lockbox account. Such COMPANY’S account shall be under COMPANY’S NAME and be operated by CONSULTANT. CONSULTANT shall establish and maintain credit and billing and collection policies and procedures, and. shall use CONSULTANT’s best efforts to timely bill and collect all professional and other fees for all billable Professional Services provided by COMPANY’s personnel, it being understood, however that COMPANY, in its sole discretion shall establish the fees for all billable Professional Services provided by COMPANY personnel. COMPANY shall timely advise CONSULTANT of any changes in COMPANY’S fee schedule to permit CONSULTANT to implement such changes. In connection with this Section 10.12 and throughout the Term, COMPANY hereby grants a special power of attorney to and appoints CONSULTANT as COMPANY’s true and lawful agent and attorney-in-fact, and CONSULTANT hereby accepts such special power of attorney and appointment, for the following purposes:

10.12.1 To bill COMPANY’S patients, in COMPANY’S name and on COMPANY’S behalf for billable Professional Services provided by COMPANY personnel.

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10.12.2 To bill, in COMPANY’S name and on COMPANY’S behalf, all claims for reimbursement or indemnification from Blue Shield/Blue Cross, Medicare, Medicaid and all other third party payers for covered billable Professional Services provided by COMPANY.

10.12.3 To collect and receive, in COMPANY’S name and on COMPANY’S behalf, all accounts receivable generated by such billings and claims for reimbursement or indemnification, and to deposit all amounts collected in the COMPANY’S Account, which account shall be and remain in COMPANY’S name. In connection herewith, COMPANY covenants to transfer and deliver to CONSULTANT all funds received by COMPANY from patients or third party payers for Professional Services unless otherwise provided for within this agreement. Upon receipt by CONSULTANT of any funds from patients or third party payers or from COMPANY pursuant hereto for Professional Services, CONSULTANT shall deposit same into the COMPANY’S Account.

10.12.4 To take custody of, endorse in the name of COMPANY, and deposit into the COMPANY’S Account any notes, checks, money orders, insurance payments, and any other instruments received in payment of the accounts receivable for Professional Services.

Upon request of CONSULTANT, COMPANY shall execute and deliver to CONSULTANT or the financial institution wherein the COMPANY’S Account is Maintained, such additional documents or instruments as may be reasonably necessary to evidence or effect the special power of attorney granted to CONSULTANT by COMPANY and the conditions pursuant to Section 10.11 or pursuant to Section 10.12 hereof

10.13 COMPANY’S ACCOUNT. CONSULTANT shall operate the COMPANY’S Account for the purposes stated herein. In connection herewith and throughout the Term, COMPANY hereby appoints CONSULTANT as COMPANY’S true and lawful agent and attorney-in-fact, and grants CONSULTANT a special power of attorney and CONSULTANT hereby accepts such special power of attorney and appointment, to deposit in the COMPANY’S Account all funds and revenues generated from the provision of Professional Services and fees collected by CONSULTANT, and to make withdrawals and sign checks for disbursement from COMPANY’S Account. COMPANY shall execute any and all additional documents required by the bank where the COMPANY’S Account is held to effectuate the power of attorney and conditions of the account granted herein, Notwithstanding the limited power of attorney granted to CONSULTANT hereunder, CONSULTANT shall furnish to COMPANY, on a monthly basis, its normal Cash Receipts and Disbursements Report.

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10.13.1 DELETED.

10.14 FISCAL MATTERS

10.14.1 ACCOUNTING AND FINANCIAL RECORDS. CONSULTANT, under COMPANY’s supervision, shall establish and administer accounting procedures, controls, and systems for the development, preparation, and safekeeping of records and books of account relating to the provision of Professional Services including billing and collections at the clinics, all of which shall be prepared and maintained in accordance with generally accepted accounting principles consistently applied on an accrual basis. CONSULTANT shall prepare and deliver to COMPANY such other financial statements or records as CONSULTANT may from time to time deem appropriate or reasonably from time-to-time request.

10.14.2 ACCESS, COMPANY shall have the right at all reasonable times during normal business hours to audit, examine, and make copies of books of account maintained by CONSULTANT pursuant to this Agreement CONSULTANT shall maintain such records for COMPANY’s access upon request for a period of four (4) years following the Term hereof.

10.15 REPORTS AND RECORDS.

10.15.1 PATIENT RECORDS. CONSULTANT, under COMPANY’s supervision, shall establish monitor, and maintain procedures and policies for the timely filing and maintenance of all patient records generated by COMPANY in connection with COMPANY’S provision of professional services. All patient records shall be treated in accordance with all applicable state and federal laws relating to the confidentiality of patient records. All patient records shall be the property of, maintained by, and in the custody of COMPANY, but COMPANY expressly agrees that CONSULTANT shall have access to such patient records, at all reasonable times during normal business hours, to the extent necessary for CONSULTANT to fulfill its obligations under this Agreement and that CONSULTANT, to the extent lawfully permitted, shall have access to such patient records, for the purpose of making necessary copies, in the event this Agreement is terminated. CONSULTANT shall maintain the confidentiality of all patient records in accordance with all applicable laws and shall establish written policies and procedures for such which are to be approved by COMPANY for the protection of confidential information.

10.15.2 REPORTS AND RECORDS. CONSULTANT shall timely create, prepare, and file such additional reports and records as are reasonably necessary and appropriate hereunder, and shall analyze and interpret such reports and records upon COMPANY’s request.

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10.16 Deleted.

10.17 Deleted.

10.18 Deleted.

10.19 PATIENT SATISFACTION QUALITY ASSURANCE. CONSULTANT shall implement and maintain a patient service satisfaction measurement system whereby data will be sought from all patients on a consistent basis to determine the level of patient satisfaction with regard to: Maintenance of clinics; Professional and Courteous service by CONSULTANT in the areas of Patient scheduling and Patient Insurance Billing Assistance; and whether the patient would recommend to others to seek medical attention on the basis of these issues. It is intended to maintain at least 90% patient satisfaction rating at all times.

10.20 PATIENTS. CONSULTANT shall use best efforts to market the COMPANY hospital facilities in Pasadena and Garland, Texas, to the community, and particularly to all patients of Union Treatment Centers who require inpatient or outpatient hospital care.

11. COVENANTS OF COMPANY

11.1 ORGANIZATION/OPERATION. COMPANY’s healthcare personnel are duly licensed and COMPANY shall at all times during the Term (i) be and remain legally organized to provide Professional Services in a manner consistent with all state and federal laws (ii) be duly authorized to conduct business in the State of Texas; and (iii) have and maintain a physician to provide Professional Services in the clinics and all other locations of COMPANY, who shall (a) hold a valid and unlimited license to practice medicine in the State of Texas, and (b) be engaged principally in the provision of Professional Services at each such location.

11.2 DELETED.

11. 3 SPECIAL CONSIDERATION/DAMAGES. COMPANY hereby recognizes and that CONSULTANT will incur substantial costs in providing the support services, personnel, management, administration, and other items and services that are the subject of this Agreement. Accordingly, COMPANY covenants and agrees that COMPANY and its personnel shall devote their best efforts to the success of the

Page 10 of 20

practice and the provision of professional Services. COMPANY shall continuously and uninterruptedly, during the term hereof maintain business hours and on such days as businesses of like nature in the community are open for business, provide services in a manner calculated to produce the maximum volume of revenue which is consistent with the professional obligation of COMPANY and in the best interest of COMPANY’s patients.

During the Term hereof and for a period of two (2) years thereafter, may be required by law, CONSULTANT and its employees, agents, directors, affiliates, shareholders and partners shall not disclose for the direct or indirect benefit of any other person or entity any initial information regarding COMPANY’s business methods, business procedures, techniques, or trade secrets or other knowledge or developed by COMPANY or any other confidential information relating to or dealing with the business operations or activities of COMPANY, made known or learned or acquired by CONSULTANT hereunder. If any restriction contained in this Section is held by any court to be unenforceable or unreasonable, a lesser restriction shall be enforced in its place and the remaining restrictions set forth herein shall be enforced independently of each other.

11.4 CONSULTANT’S INSURANCE. CONSULTANT shall provide, obtain, and maintain throughout the Term appropriate insurance coverage for CONSULTANT’s employed personnel and shall carry professional Liability insurance covering CONSULTANT and all of CONSULTANT’S professional personnel in the minimum amount of Two Hundred Thousand Dollars ($200,000) for each occurrence and Six Hundred Thousand Dollars ($600,000) annual aggregate, and such amounts reasonable for all other professional Personnel ( collectively, Professional Insurance”). Such professional insurance policy or policies maintained by CONSULTANT shall include COMPANY as additional insured, if permitted by the insurer. CONSULTANT shall provide COMPANY a certificate of insurance evidencing such coverage on an annual basis. The insurance policy or policies shall provide for at least thirty (30) days advance written notice to CONSULTANT from the insurer as to any alteration of coverage, cancellation, or proposed cancellation of coverage for any cause. The certificate of insurance shall require such notice to also be given to COMPANY. CONSULTANT shall notify COMPANY of all legal actions or proceedings instituted by or against CONSULTANT arising out of or related to CONSULTANT’S operation of the clinics.

11.5 MUTUAL INDEMNIFICATION. CONSULTANT, its officers, its employees, and its agents will incur no liability in connection with the conduct of COMPANY prior to the effective date of this Agreement. Accordingly, COMPANY shall and hereby does indemnify, hold harmless, and agrees to defend CONSULTANT and its officers, employees, and agents from and against any claims, obligations, demands, causes of action, losses, liabilities, damages, costs and expenses, including reasonable attorney’s fees (collectively “Claims) arising out of or connected with the conduct of

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COMPANY prior to the effective date of this Agreement. CONSULTANT shall not, by entering into this Agreement and performing hereunder, assume or become liable for any of existing or future Claims made against COMPANY. COMPANY shall and hereby does indemnify, hold harmless, and agrees to defend CONSULTANT, its officers, employees, and agents, from and against any Claims arising out of or connected with the negligence or fault of COMPANY, its employees, agents, contractors or COMPANY’s performance of its obligations hereunder. If any Claim shall arise hereunder CONSULTANT shall give prompt written notice of such Claim to COMPANY, except that any delay or failure of notice shall not relieve COMPANY of the obligations hereunder except to the extent such delay has materially prejudiced COMPANY.

Likewise, COMPANY, its officers, its employees, and its agents will incur no liability in connection with the conduct of CONSULTANT prior to the effective date of this Agreement. Accordingly, CONSULTANT shall and hereby does indemnify, hold harmless, and agrees to defend COMPANY and its officers, employees, and agents from and against any claims, obligations, demands, causes of action, losses, liabilities, damages, costs and expenses, including reasonable attorney’s fees (collectively “Claims) arising out of or connected with the conduct of CONSULTANT prior to the effective date of this Agreement. COMPANY shall not, by entering into this Agreement and performing hereunder, assume or become liable for any of existing or future Claims made against CONSULTANT. CONSULTANT shall and hereby does indemnify, hold harmless, and agrees to defend COMPANY, its officers, employees, and agents, from and against any Claims arising out of or connected with the negligence or fault of CONSULTANT, its employees, agents, contractors or CONSULTANT’s performance of its obligations hereunder. If any Claim shall arise hereunder COMPANY shall give prompt written notice of such Claim to CONSULTANT, except that any delay or failure of notice shall not relieve CONSULTANT of the obligations hereunder except to the extent such delay has materially prejudiced CONSULTANT.

11.6 Deleted.

11.7 EQUIPMENT. Deleted.

12. Deleted

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13. CONDEMNATION, BANKRUPTCY, EFFECTS OF TERMINATION

13.1 Deleted.

13.2 Deleted:

13.2.1 Deleted.

13.2.2 Deleted.

13.2.3 Deleted.

13.2.4 BANKRUPTCY. In the event that either party becomes insolvent, or if any petition under federal or State law pertaining to bankruptcy or insolvency or for a reorganization or arrangement or other relief from creditors shall be filed by or against either party, or if any assignment, trust, mortgage, or other transfer shall be made of all or a substantial part of the property of either party, or if either party shall make or offer a composition in its debts with its creditors, or if a receiver, trustee, or similar officer or creditor’s committee shall be appointed to take charge of any property of or to operate or wind up the affairs of either party, then the other party may by written notice immediately terminate this Agreement.

13.2.5 Deleted.

13.2.6 Deleted.

13.2.7 Deleted.

13.2.8 Deleted.

13.3 EFFECTS OF TERMINATION. Upon termination of this Agreement, as herein above provided, neither party shall have any further obligations hereunder except for (i) obligations accruing prior to the date of termination, and (ii) obligations, promises, or covenants set forth herein or in those collateral agreements of even date herewith that are expressly made to extend beyond the Term, including, without limitation, indemnities, non-compete and, fees which provisions shall survive the expiration or termination of this Agreement. A final accounting shall be conducted as to each clinic prior to termination. All outstanding fees and loans owed by COMPANY are to be paid prior to the termination date. COMPANY shall retain the license to use the name UNION TREATMENT CENTERS.

13.4 CONTINUED PROFESSIONAL SERVICES. Following any notice of termination hereunder, whether given by CONSULTANT or COMPANY, COMPANY and CONSULTANT will fully cooperate with each other in all matters relating to the performance or discontinuance of professional Services, as appropriate, at the Premises by COMPANY and the orderly transition of patients.

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13.5 Deleted.

14. MISCELLANEOUS

14.1 EXHIBITS, SCHEDULES AND OTHER INSTRUMENTS. As used herein, the expression “this Agreement” means the body of this Agreement and all exhibits, certificates, and schedules and the expressions “herein,” “hereof,” and “hereunder” and other words of similar import refer to this Agreement and such exhibits, certificates, and schedules as a whole and not to a particular part or subdivision thereof unless otherwise clearly indicated.

14.2 INDEPENDENT RELATIONSHIP. It is mutually understood and agreed that COMPANY and CONSULTANT, in performing their respective duties and obligations under this Agreement, are at all times acting and performing as independent contractors with respect to each other, and nothing in this Agreement is intended nor shall be construed to create an employer/employee relationship or a joint venture relationship, or to allow CONSULTANT to exercise control or direction of any nature, kind, or description over the manner or method by which COMPANY personnel perform Professional Services.

14.3 NOTICES. Any notice, demand, or communication required, permitted, or desired to be given shall be deemed effectively given (i) when personally delivered, (ii) upon receipt when delivered by telephonic document transfer, (iii) three (3) business days next following the day the notice is, mailed by prepaid certified mail, return receipt requested, or (iv) the next business day following deposit with a reputable overnight courier, addressed as follows:

COMPANY:

DOCTORS PRACTICE MANAGEMENT, INC.

10304 I-10 East, Suite 369.

Houston, Texas 77029

Attn: Philip Chan

CONSULTANT:

CCM&D CONSULTING, LLC

8900 Shoal Creek Blvd.

Austin, Texas 78757

Attn: Garry Craighead

Page 14 of 20

or to such other address, and to the attention of such other person or officer as any party may designate, with copies thereof to the respective counsel thereof as notified by such party. Rejection or other refusal to accept or the inability to deliver because of change of address of which no notice was given in accordance with the provisions hereof shall be deemed to be receipt of the notice sent.

14.4 . FEES AND COSTS. In the event either party brings any legal action for relief against the other, declaratory or otherwise, arising out of this Agreement (including actions to enforce and interpret this Agreement), the losing party shall pay to the prevailing party, in addition to any other relief to which such party shall be entitled, a reasonable sum for attorneys fees incurred in bringing such suit and/or enforcing any judgment granted therein all of which shall be deemed to have accrued upon the commencement of such, action and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney fees and costs incurred in enforcing such judgment, in addition to any other relief to which such party shall be entitled.

14.5 CHOICE OF LAW AND VENUE. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN AND SHALL BE INTERPRETED, CONSTRUED, ENFORCED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND THE STATE DISTRICT COURTS OF THAT STATE IN THE COUNTY OF HARRIS SHALL BE THE EXCLUSIVE COURTS OF JURISDICTION AND VENUE FOR ANY LITIGATION, SPECIAL PROCEEDING OR OTHER PROCEEDING AS BETWEEN THE PARTIES THAT MAY BE BROUGHT, OR ARISE OUT OF, IN CONNECTION OR BY REASON OF THIS AGREEMENT. THE PARTIES HEREBY CONSENT TO THE JURISDICTION OF SUCH COURTS.

14.6 Deleted.

14.7 WAIVER OF BREACH. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as, or be construed to constitute, a waiver of any subsequent breach of the same or another provision hereof.

14.8 ENFORCEMENT. Deleted.

14.9 GENDER AND NUMBER. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. The term “person” when used herein shall mean an individual, partnership, joint venture, corporation, trust, government entity, and association.

Page 15 of 20

14.10 ADDITIONAL ASSURANCES. Except as may be herein specifically provided to the contrary, the provisions of this Agreement shall be self-operative and shall not require further agreement by the parties; provided, however, at the request of either party, the other party shall execute such additional instruments and take such additional acts as are reasonable and as the requesting party may deem necessary to effectuate this Agreement.

14.11 CONSENTS, APPROVALS, AND EXERCISE OF DISCRETION. Except as may herein specifically provided to the contrary, whenever this Agreement requires any consent or approval to be given by either party, or either party must or may exercise discretion, the parties agree that such consent or approval shall not be unreasonably withheld or delayed, and such discretion shall be reasonably exercised in good faith.

14.12 FORCE MAJEURE. Neither party shall be liable or deemed to be in default for any delay or failure in performance under this Agreement or other interruption of service deemed to result, directly or indirectly, from acts of God, civil or military authority, acts of public enemy, war, accidents fires, explosions, earthquakes, floods, failure of transportation, strikes or other work interruptions by either party’s employees, or any other similar cause beyond the reasonable control of either party.

14.13 SEVERABILITY. In the event any provisions of this Agreement is held to be invalid, illegal, or unenforceable for any reason and in any respect, if the extent of such invalidity, legality or unenforceability does not destroy the basis of the bargain herein, such invalidity, illegality or unenforceability shall in no event affect, prejudice, or disturb the validity of the remainder of this Agreement, which shall be in full force and effect enforceable in accordance with its terms as if such provisions had not been included, or had been modified as provided below, as the case may be. To carry out the intent of the parties hereto as fully as possible, the invalid illegal or unenforceable provision(s), if possible, shall be deemed modified to the extent necessary and possible to render such provision(s) valid and enforceable. In the event this Agreement cannot be modified to the satisfaction of the parties hereto, then either party may terminate this Agreement upon ten (10) days written notice.

14.14 DIVISIONS AND HEADINGS. The division of this Agreement articles, sections, and subsections and the use of captions and headings in connection therewith are solely for convenience and shall not affect in any way the meaning or interpretation of this Agreement.

14.15 AMENDMENTS AND AGREEMENT. This Agreement and amendments thereto shall be in writing and executed in multiple copies on behalf of COMPANY by its duly authorized representative and on behalf of CONSULTANT by its duly authorized representative. Each multiple copy shall be deemed an original, but all multiple copies together shall constitute one and the same instrument.

Page 16 of 20

147.16 Deleted.

14.17 ENTIRE AGREEMENT/AMENDMENT. This Agreement and collateral agreements of even date herewith supersede all previous agreements (written or oral), and constitutes the entire agreement of whatsoever kind or nature existing between or among the parties respecting the within subject matter and no party shall be entitled to benefits other than those specified herein. As between or among the parties, no oral statements or prior written material not specifically incorporated herein shall be of any force and effect, the parties specifically acknowledge that in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements, whether written or verbal, not expressly incorporated herein are superseded. This Agreement may not be amended, supplemented, canceled or discharged except by written instrument executed by all parties hereto. This Agreement may be executed in two or more counterparts, each and all of which shall be deemed an original and all of which together shall constitute one instrument. It shall not be necessary that the signatures of all of the parties appear on each counterpart; it shall be sufficient that the signature of each party appear on one or more counterparts.

14.18 RULES OF CONSTRUCTION. The parties acknowledge that each party and its counsel have had an opportunity to review and revise this Agreement, and the parties hereby agree that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits, certificates and schedules hereto.

14.19 REPRODUCED COPIES OF DOCUMENTS. This Agreement and all documents relating hereto other than promissory notes, including without limitations (a) consents, waivers, and modifications which may hereinafter be executed, (b) documents received by any party at the Closing, (c) financial statements, certificates and other information previously or hereafter furnished, may be reproduced by any means or process including electronic or mechanical means. Any reproduction shall be admissible into evidence as the original itself in any Litigation without regard to whether the original is in existence. If a party signs this Agreement and then transmits an electronic facsimile of the signature page the recipient may rely upon electronic facsimile as a signed original of this Agreement without modification or change unless same is noted thereon.

14.20 THIRD PARTIES. None of the provisions of this Agreement shall be for the benefit of third parties or enforceable by any third party except as otherwise contained

Page 17 of 20

herein. Any agreement to pay an amount and any assumption of a liability herein contained, expressed or implied, shall only be for the benefit of the parties hereto and such agreement or assumption shall not inure to the benefit of the any third party, including an obligee.

IN WITNESS WHEREOF, COMPANY AND CONSULTANT HAVE EXECUTED THIS AGREEMENT IN MULTIPLE ORIGINALS AS OF THE DATE WRITTEN ABOVE.


DOCTORS PRACTICE MANAGEMENT, INC. 10304 Interstate 10 East Suite 369 Houston, Texas 77029

By:		/s/ Philip Chan
Name:		Philip Chan
Title:		Chief Financial Officer
Date:		July 7, 2011

Page 18 of 20


CCM&D CONSULTING, L.L.C. 8900 Shoal Creek Blvd. Bldg. # 200 Austin, Texas 78757

By:		/s/ Dr. Garry Craighead
Name:		Dr. Garry Craighead
Title:		Chief Executive Officer
Date:		July 7, 2011

Page 19 of 20

SCHEDULE A

Consultant shall locate a potential clinic site and conduct patient demographic research.

Consultant shall consult with COMPANY and obtain its approval prior to acquiring the site.

From the maximum total budget not to exceed $250,000, COMPANY shall provide the down payment and lease deposit, or in the case of new construction, the cost of the construction. Company shall have the right to approve all subcontractors. All subcontractors shall be bonded and insured, and all subcontracts shall be on standard AIA construction contract forms. Consultant shall be responsible for obtaining all necessary permits and inspections.

When the site has been acquired, Consultant shall consult with Company and prepare a budget for the required buildout (if any). Company shall have the right to approve the budget and all subcontractors. All subcontractors shall be bonded and insured, and all subcontracts shall be on standard AIA construction contract forms. Consultant shall be responsible for obtaining all necessary permits and inspections. Payment shall be made from the maximum $250,000 budget.

Consultant shall consult with Company and prepare an agreed budget for the utilities, equipment, furnishings, and personnel for the clinic.

Consultant shall be responsible for obtaining the utilities, equipment, furnishings, and personnel for the clinic, and obtaining the necessary licenses and permits, which shall be paid out of the maximum $250,000 budget.

Consultant shall prepare and submit for Company’s approval a monthly operating budget for the first six months of the operation of said clinic. The start-up operating expenses shall be paid out of the fund not to exceed a maximum of $250,000.

Consultant shall consult with Company to engage a physician to enter into a physician services contract at the clinic.

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EX-15.1 6 dex151.htm AWARENESS LETTER OF KILLMAN, MURRELL & COMPANY, P.C. Awareness Letter of Killman, Murrell & Company, P.C.

EXHIBIT 15.1

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

AWARENESS LETTER

Securities and Exchange Commission

Washington, D.C. 20549

We are aware that our report dated July 13, 2011 on our review of the interim consolidated financial statements of Dynacq Healthcare, Inc. as of and for the three and nine month periods ended May 31, 2011 and 2010 and included in this Form 10-Q for the quarter ended May 31, 2011 is incorporated by reference in the Company’s Registration Statement No. 333-72756. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered as part of the Registration Statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act.

/s/ Killman, Murrell & Company, P.C.

Killman, Murrell & Company, P.C.

Houston, Texas

July 13, 2011

EX-23.1 7 dex231.htm CONSENT OF KILLMAN, MURRELL & COMPANY, P.C. Consent of Killman, Murrell & Company, P.C.

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation of our review report dated July 13, 2011 with respect to the consolidated financial statements of Dynacq Healthcare, Inc. included in the Quarterly Report (Form 10-Q) for the quarter ended May 31, 2011.

/s/ Killman, Murrell & Company, P.C.

Killman, Murrell & Company, P.C.

Houston, Texas

July 13, 2011

EX-31.1 8 dex311.htm SECTION 302 CERTIFICATION OF CEO Section 302 Certification of CEO

EXHIBIT 31.1

CERTIFICATION

I, Chiu M. Chan, Chief Executive Officer of Dynacq Healthcare, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dynacq Healthcare, Inc.;

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 quarterly 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;

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 quarterly 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 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 the registrant’s board of directors (or persons performing the equivalent functions):

(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.

/s/ Chiu M. Chan

Chiu M. Chan

Chief Executive Officer

(principal executive officer)

Date: July 13, 2011

EX-31.2 9 dex312.htm SECTION 302 CERTIFICATION OF CFO Section 302 Certification of CFO

EXHIBIT 31.2

CERTIFICATION

I, Philip S. Chan, Chief Financial Officer of Dynacq Healthcare, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dynacq Healthcare, Inc.;

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;

(a)

(b)

(c)

(d)

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 the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(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.

/s/ Philip S. Chan

Philip S. Chan

Chief Financial Officer

(principal financial and accounting officer)

Date: July 13, 2011

EX-32.1 10 dex321.htm SECTION 906 CERTIFICATION OF CEO Section 906 Certification of CEO

EXHIBIT 32.1

CERTIFICATION OF PERIODIC REPORT

In connection with the Quarterly Report of Dynacq Healthcare, Inc. (the “Company”) on Form 10-Q for the quarterly period ended May 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chiu M. Chan, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 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.

/s/ Chiu M. Chan

Chiu M. Chan

Chief Executive Officer

July 13, 2011

EX-32.2 11 dex322.htm SECTION 906 CERTIFICATION OF CFO Section 906 Certification of CFO

EXHIBIT 32.2

CERTIFICATION OF PERIODIC REPORT

In connection with the Quarterly Report of Dynacq Healthcare, Inc. (the “Company”) on Form 10-Q for the quarterly period ended May 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip S. Chan, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 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.

/s/ Philip S. Chan

Philip S. Chan

Chief Financial Officer

July 13, 2011