DynTek Announces Third Quarter Fiscal Results

DynTek, Inc. (OTC Bulletin Board: DYTK - News, DYTKP - News, DYTKW - News), a leading provider of professional technology services, advanced network infrastructure, voice over internet protocol ("VoIP"), and IT security solutions, today announced its financial results for the third fiscal quarter ended March 31, 2005.

Third Quarter Financial Results

Revenue for the three months ended March 31, 2005 was approximately $19.0 million as compared with revenue of approximately $12.1 million for the comparable 2004 period, an increase of approximately 57%. The increase in revenue during the quarter is primarily attributable to an increase in revenues from the Company's Southwest Region, which was formed subsequent to the acquisitions of Redrock Communications ("Redrock") in September 2004 and Integration Technologies, Inc. ("ITI") in October 2004. The Company also continues to experience organic growth in its core business.

Net loss for the three months ended March 31, 2005 was $3.7 million, or $0.05 per fully diluted share, compared to a net loss of $1.1 million, or $0.02 per fully diluted share, for the quarter ended March 31, 2004. The third quarter 2005 net loss includes approximately $2.4 million in non-cash items, including depreciation and amortization, warrant expense, write-downs of investments, a non-cash loss on extinguishment of debt, and non-cash interest expense related to the Company's convertible notes.

Revenue Growth and Integration Costs

Steve Ross, CEO of DynTek, said, "We are pleased with the strong growth in our revenue, an increase of almost 60% year over year. And, several significant orders obtained at the end of the quarter will likely be recognized as revenue in our fourth quarter ending June 30. Our fourth quarter is already showing substantially better bookings than the third fiscal quarter, and I believe we will produce record-setting revenue results for the final three months of fiscal 2005. For instance, I would point to our previously-announced 100% revenue growth in the VoIP business, the recent multi-year security contract award in the State of Florida, and the overall demand for our network security and VoIP offerings."

Ross continued, "Our third quarter results also reflect financial and other costs of the integration of the ITI and Redrock businesses, which was completed in March. Among other things, during the quarter, we integrated the Southwest Region management and sales teams, commenced the transition of accounting systems and back-office processes, and moved all Southwest field operations into a single facility. These integration efforts have not come without costs. While our third quarter results reflect strong year-over-year revenue improvement, they are not satisfactory to me or to our management team. Going forward, we need to take additional actions to drive our top line, improve our margins and reduce our costs. Unfortunately, we now believe that some of the integration and transition activities during the early part of the third fiscal quarter may have negatively impacted our ability to attain previously-announced calendar 2005 targets of $100 million in revenues and positive EBITDA, and investors should no longer rely on those previously-announced targets when assessing DynTek's business."

Fiscal Year-to-Date Transitional Highlights

Ross stated, "I think it is important to highlight several other changes in our business from last year, changes that I believe will lead to improved results, not just for a quarter or two, but much longer.

"In prior periods, we were very dependent on government and education budget cycles for our business. Government and education business represented approximately 82% of our business in fiscal 2004, and 87% in fiscal 2003. Commercial entities only represented 18% and 13% of our revenues during those periods, respectively. However, during the last several months, we have expanded our presence in the commercial sector, which represented approximately 48% of our revenues during the three-month period ended March 31, 2005, compared to 52% from the government and education sectors.

"Similarly, in the prior fiscal year our business was concentrated in the New York region. In March of 2004, more than 70% of our revenues came from the New York area. We have broken out of that reliance on one region, and we now generate almost as much revenue in the Southwest as we do from New York. Moreover, the combined contributions from our regional operations in the Midwest, Southeast and Canada account for almost a quarter of the remainder.

"Our management team has been significantly strengthened with the addition of Casper Zublin as COO, and Robert Webber as CFO. Also, in order to better capture the expanding opportunities in the security space, Bill Tomlinson joined us from ITI (and previously Microsoft) to create and lead our national IT security practice. We now have a much more integrated security practice, with a multi-regional presence, and we are starting to benefit from cross selling opportunities. As an example, I would mention again our multi-year contract award with the State of Florida, a key win during the third fiscal quarter under which we will start recognizing revenues during the current quarter. Such wins, and the efforts of our other security practice leaders, Alex Woda in Canada and Frank Lyons in the eastern United States, have helped make our security business a profit center.

"In addition, following the acquisitions of Redrock and ITI, we are increasing to what I like to think of as the critical mass that is necessary for a publicly held company. There is a certain size below which the costs of being public outweigh the benefits, and a year ago, I think we were on the wrong side of that balance. Yet, after raising additional capital and making a couple of strategic acquisitions, we are closing the gap.

"During the past year, we have begun making the necessary improvements to our business operations and structure, and already in the fourth quarter, we have realized the benefits from these changes."

About DynTek

DynTek is a leading provider of professional technology services to government, education and mid-market commercial customers in the largest IT markets nationwide. The company provides solutions that address the critical business needs of organizations today, such as IT security, voice and data convergence (VoIP), enterprise access and technology management. Our practice areas incorporate an approach and methodology derived from over 18 years of experience in the assessment, design, implementation, management and support of technology solutions. For more information, visit www.dyntek.com.

Forward-Looking Statements

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 attract future customers, the ability to finance and sustain operations, including the ability to comply with the terms of the Textron Factoring Facility 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, despite historical losses from operations, the ability to fulfill the Company's obligations to third parties, and ability to resolve successfully certain ongoing litigation over contract performance in the state of Virginia, the size and timing of additional significant orders and their fulfillment, the ability to turn contract backlog into revenue and net income, the continuing desire of state and local governments to outsource to private contractors, the ability to successfully integrate recent acquisitions, the ability to continue to implement an acquisition growth strategy, the ability to achieve financial targets, the retention of certain key managers, the performance of successful government and commercial technology services, the ability to develop and upgrade our technology, the continuation of general economic and business conditions that are conducive to governmental outsourcing of service performance and the acquisition of other services and product, the ability to maintain its securities 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, 2004, our Quarterly Reports on Form 10-Q filed on November 15, 2004, February 14, 2005, and May 16, 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.





DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

ASSETS March 31, 2005 June 30, 2004
CURRENT ASSETS: (unaudited)
Cash 828 2,810
Cash - Restricted 417 479
Accounts receivable, net of allowance
for doubtful accounts of $260 15,711 12,045
Inventories 977 1,255
Prepaid expenses and other assets 120 54
Other receivables 23 88
TOTAL CURRENT ASSETS 18,076 16,731


RESTRICTED CASH - over one year 86 91

INVESTMENTS - Marketable Securities 51 78

INVESTMENTS - Preferred Stock 500 1,104
PROPERTY AND EQUIPMENT, net of accumulated


depreciation of $3,157 and $3,035 1,629 663

GOODWILL 23,101 19,869
CAPITALIZED SOFTWARE COSTS, net of


accumulated amortization of $734 and $652 81 163
ACQUIRED CUSTOMER LIST, net of accumulated


amortization of $8,502 and $7,136 5,336 5,542
PURCHASED SOFTWARE, net of accumulated


amortization of $690 and $671 -- 19
DEFERRED FINANCING COSTS, net of accumulated


amortization of $357 and $77 1,124 655
NOTES RECEIVABLE, long term, including


receivable from officer of $100 300 548

DEPOSITS AND OTHER ASSETS 534 186
TOTAL ASSETS $50,818 $45,649


LIABILITIES AND STOCKHOLDERS' EQUITY



CURRENT LIABILITIES:
Accounts payable $6,714 $5,897
Line of credit 3,651 2,454
Acquisition costs 4,250 --
Accrued expenses 1,484 1,468
Deferred revenue 681 559
Notes payable - accrued interest 257 79
Notes payable current portion 2,280 1,812
Liabilities of discontinued operations 717 4,181
TOTAL CURRENT LIABILITIES 20,034 16,450


DEFERRED REVENUE - long term 86 91
LONG TERM NOTE PAYABLE 7,652 3,505
TOTAL LIABILITIES 27,772 20,046


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:


Preferred stock, $.0001 par value,
10,000,000 shares authorized; 583,124
and 683,317 shares issued and
outstanding as of March 31, 2005 and
June 30, 2004, respectively 1 1
Common stock, $.0001 par value,
150,000,000 shares authorized; 75,298,245
and 58,430,597 shares issued and
outstanding as of March 31, 2005 and
June 30, 2004 respectively 5 5
Additional paid-in capital 109,050 100,822
Deferred compensation (103) --
Accumulated other comprehensive loss (199) (170)
Accumulated deficit (85,708) (75,055)
TOTAL STOCKHOLDERS' EQUITY 23,046 25,603
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $50,818 $45,649


The accompanying notes are an integral part of these condensed consolidated

financial statements.



DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
(Unaudited, in thousands, except per share data)

Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
REVENUES:
Product Revenues $11,936 $4,673 $31,081 $13,735
Service Revenues 7,113 7,423 22,753 21,087
Total revenues 19,049 12,096 53,834 34,822

COST OF REVENUES:
Cost of products 10,383 3,846 25,984 11,893
Cost of services 5,450 5,767 17,801 16,809
Total cost of
revenues 15,833 9,613 43,785 28,702
GROSS PROFIT 3,216 2,483 10,049 6,120

OPERATING EXPENSES:
Selling expenses 3,096 1,494 7,469 5,134
General and
administrative
expenses 1,490 985 3,878 3,098
Non cash expense
for warrants 51 -- 94 --
Depreciation and
amortization 732 791 2,273 2,132
Goodwill Impairment -- -- 6,026 3,000
Total operating
expenses 5,369 3,270 19,740 13,364

LOSS FROM OPERATIONS (2,153) (787) (9,691) (7,244)

OTHER INCOME (EXPENSE):
Loss on sale of
marketable securities -- -- -- (107)
Loss on extinguishment
of debt (336) (336) --
Loss on investment (604) (982) --
Interest expense (529) (199) (1,205) (700)
Other expense -- -- (50)
Interest income 8 2 20 95
Total other income
(expense) (1,461) (197) (2,553) (712)

LOSS FROM CONTINUING
OPERATIONS $(3,614) $(984) $(12,244) $(7,956)

DISCONTINUED
OPERATIONS
Gain (loss) on
disposal of
discontinued
operations (83) (23) 1,593 (228)

NET LOSS $(3,697) $(1,007) $(10,651) $(8,184)

NET LOSS PER SHARE:
Basic and Diluted
Continuing Operations (.05) (.02) (.20) (.17)
Discontinued Operations -- -- .03 (.01)
$(.05) $(.02) $(.17) $(.18)

WEIGHTED AVERAGE NUMBER
OF SHARES USED IN
COMPUTATION -
Basic and
Diluted 66,811,175 48,215,944 62,760,620 46,453,466

NET LOSS $(3,697) $(1,077) $(10,651) $(8,184)

COMPREHENSIVE LOSS,
NET OF TAX

Change in
unrealized gain
(loss) on
available-for-
sale-securities 8 1 75 95

COMPREHENSIVE LOSS $(3,689) $(1,006) $(10,576) $(8,089)






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Source: DynTek, Inc.

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