DynTek, Inc. (OTC Bulletin Board: DYTK), a leading provider of professional technology services, today announced results for its third fiscal quarter and nine months ended March 31, 2006.
"Our third fiscal quarter was marked by the completion of our recapitalization plan and the enactment of additional G&A cost controls," said Casper Zublin, Jr., DynTek's chief executive officer. "As such, we ended the quarter with an improved balance sheet and approximately $800,000 in reduced overhead expenditures annualized on a go-forward basis. Now we are turning our management attention to our income statement and driving the organic growth of the business. This past quarter was impacted by financing challenges and cash flow concerns at the operational level. We expect to see a renewed growth both at the revenue and EBITDA line, with substantial improvements visible in our fourth fiscal quarter."
Nine Months Results
Revenues for the nine months ended March 31, 2006 increased to $56,575,000 from $53,834,000 for the nine months ended March 31, 2005.
Gross profit decreased from $10,049,000 in the nine months ended March 31, 2005 to $8,411,000 in the nine months ended March 31, 2006. Gross margin for the nine months ended March 31, 2006 was 15%, compared to 19% for the similar period in the prior fiscal year. While services margin increased from 22% to 23%, product margin decreased from 16% to 11%. Product margins are subject to competitive pricing pressures and fluctuate from period to period depending on the mix of products the company provides. The company believes that current product margins are more reflective of the present marketplace and likely to continue at or near present levels into the foreseeable future.
General and administrative expenses increased to $4,301,000 for the nine months ended March 31, 2006, from $4,256,000 for the nine months ended March 31, 2005. The company incurred significant one-time restructuring and reorganization charges as part of the announced cost reductions during the first quarter of 2005 and the third quarter of 2006, coupled by increases in professional services expense to implement these improvements for the purpose of lowering our overall future cost structure.
Net loss for the nine months ended March 31, 2006 was $21,634,000, compared to a net loss of $10,651,000 for the nine months ended March 31, 2005. The net loss during the nine months ended March 31, 2006 includes depreciation and amortization expense of $2,012,000, non-cash option expense of $205,000, interest expense of $5,563,000 (including a non-cash portion of $3,970,000), a valuation adjustment on the investment in TekInsight of $505,000, and a $9,401,000 loss on the extinguishment of debt obligations under the ITI Notes and the 9% Notes; offset by a gain on extinguishment of trade payable debt of $880,000. The net loss in the 2005 period included a gain from discontinued operations of $1,593,000 and a goodwill impairment expense of $6,026,000.
Third Fiscal Quarter Results
Revenues for the three months ended March 31, 2006 decreased to $14,296,000 from $19,049,000 for the three months ended March 31, 2005. The BPO business, which is being de-emphasized, accounted for $1,642,000 of the decrease in sales for the three months ended March 31, 2006.
Gross profit decreased on the effects of the decline in revenue from $3,216,000 in the quarter ended March 31, 2005 to $1,108,000 in the quarter ended March 31, 2006. Gross margin as a percentage of sales decreased from 17% for the three months ended March 31, 2005 to 8% for the three months ended March 31, 2006. Service margins dropped from 23% to 8%, largely reflective of the liquidity/funding concerns early in the period and low utilization of service personnel. Product margin fell from 13% to 8%. A one time inventory valuation loss of $223,000 was realized amounting to 2% of product sales.
General and administrative expenses increased to $1,816,000 for the three months ended March 31, 2006, from $1,490,000 for the three months ended March 31, 2005. This increase is mainly the result of one-time restructuring and reorganization costs of $450,000, an increase in legal expenses of $100,000, and additional audit fees incurred of $137,000.
Net loss for the quarter ending March 31, 2006 was $15,697,000, as compared to a net loss of $3,697,000 for the three months ended March 31, 2005. The net loss was significantly impacted by $13,044,000 of one-time and non-cash charges related to our recapitalization, restructuring and reorganization activities, and operations.
These charges of $13,044,000 included a non-cash charge on the extinguishment of debt obligations for both the ITI Notes and the 9% Notes of $9,401,000 as the settlement for the conversion to rights to receive shares of the Company's stock was valued at $0.04 per share (the difference between fair value and the conversion price of $0.02 per share). This was offset by a gain on the extinguishment of trade payables debt of $880,000. One-time restructuring of $756,000 impacted selling and general and administrative expenses. Interest charges were $2,070,000 which included $1,599,000 of non-cash interest expense and included the cancellation of all debt discounts and deferred financing cost related to the cancellation of the Laurus Note and the 9% Notes conversion. Depreciation and amortization was $632,000 and a decision to devalue one of our investments for $505,000 was made. We also experienced an inventory loss of $223,000 and increased our bad debt reserves by $100,000 and our professional fees reserve by $237,000.
DynTek is a leading provider of professional technology services to mid-market customers, such as state and local governments, educational institutions and commercial entities in the largest IT markets nationwide. The company offers technology practices in IT security, advanced network infrastructure, voice over internet protocol ("VOIP"), and access infrastructure. DynTek's multi-disciplinary approach allows our clients to turn to a single source for their most critical technology requirements. For more information, visit http://www.dyntek.com.
This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that certain statements in this release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks, uncertainties and other factors. Such uncertainties and risks include, among others, success in reaching target markets for services and products in a highly competitive market and the ability to maintain existing and attract future customers; the ability to finance and sustain operations, including the ability to comply with the terms of working capital facilities and/or other term indebtedness of the Company, and to extend such obligations when they become due, or to replace them with alternative financing; the ability to raise equity capital in the future; the ability to achieve profitability despite historical losses from operations; the ability to maintain business relationships with IT product vendors and the ability to procure products as necessary; the size and timing of additional significant orders and their fulfillment; the continuing desire of and available budgets for state and local governments to outsource to private contractors; the ability to successfully identify and integrate acquisitions; the retention of skilled professional staff and certain key executives; the performance of the Company's government and commercial technology services; the continuation of general economic and business conditions that are conducive to outsourcing of IT services; the ability to maintain trading on the NASD OTC Bulletin Board or other markets in the future; and such other risks and uncertainties included in our Annual Report on Form 10-K filed on September 29, 2005, and other SEC filings. The Company has no obligation to publicly release the results of any revisions, which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.