SUNLINK HEALTH SYSTEMS, INC. Forward-Looking Statements
This Quarterly Report and the documents that are incorporated by reference in
this Quarterly Report contain certain forward-looking statements within the
meaning of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include all statements that do not relate solely to historical or current facts
and may be identified by the use of words such as "may," "believe," "will,"
"seeks to", "expect," "project," "estimate," "anticipate," "plan" or "continue."
These forward-looking statements are based on the current plans and expectations
and are subject to a number of risks, uncertainties and other factors which
could significantly affect current plans and expectations and our future
financial condition and results. Throughout this annual report and the notes to
the condensed consolidated financial statements,
General Business Conditions
• general economic and business conditions in the U.S. , both nationwide and
in the states in which we operate;
• the effects of the coronavirus ("COVID-19") pandemic, both nationwide and
in the states in which we operate, including among other things, on demand
for our customary services, the efficiency of such services, availability
of staffing, availability of supplies, costs and financial results;
• the effects of COVID-19 on our ability to provide for customary services
including the large number of unvaccinated persons and plateaued or
stagnant vaccination and booster rates in Georgia , Louisiana and
Mississippi , the primary states in which we conduct healthcare operations.
Future COVID-19 or other pandemics of other contagious diseases could
result in the unavailability of personnel to provide services, regulatory
bans on certain services or admissions, decreased occupancy levels,
increase costs, reduce our revenues and otherwise adversely affect our
business;
• increases in uninsured and/or underinsured patients due to COVID-19,
unemployment or other conditions, higher deductibles and co-insurance, or
other terms of health insurance and drug coverage resulting in higher bad
debt amounts;
• the competitive nature of the U.S. community hospital, extended care and
rehabilitation center, nursing home, and pharmacy businesses;
• demographic characteristics and changes in areas where we operate,
including resistance to vaccination for COVID-19;
• any new variants of the COVID-19 virus and other SARS-COV-2 viruses and
other infectious diseases;
• the availability of cash or borrowings to fund working capital,
renovations, replacements, expansions, and capital improvements at
existing healthcare and pharmacy facilities and for acquisitions and
replacement of such facilities;
15--------------------------------------------------------------------------------
• changes in accounting principles generally accepted in theU.S. ; • the impact of inflation on our patients, operating costs, ability and feasibility of raising funds, and on our ability to achieve cash flow and profitability, including our inability to cover cost increases because most of our revenue is from government programs whose payments are fixed; and • fluctuations in the market value of equity securities including SunLink common shares, including fluctuations based on fears of actual inflation or recession.
Operational Factors
• the ability or inability to operate profitably in one or more segments of
the healthcare business;
• the availability of, and our ability to attract and retain, sufficient
qualified staff physicians, management, nurses, pharmacists, and staff
personnel for our operations;
• timeliness and amount and conditions on of reimbursement payments received
under government programs;
• the lack of availability of future governmental support that may be
required to offset the continuing effects of the COVID-19 pandemic and
absence of forgiveness features in any such future loans or an inability
to meet the usage or forgiveness requirements;
• the ability to achieve compliance with requirements of the expenditure and
retention of Provider Relief Funds ("PRF");
• the ability or inability to fund our obligations under capital leases or
new or existing obligations and/or any existing or potential defaults
under existing indebtedness;
• restrictions imposed by existing or future contractual obligations
including existing or new indebtedness;
• the cost and availability of insurance coverage including professional
liability (e.g., medical malpractice) and general, employment, fiduciary,
and other liability insurance;
• the efforts of governmental authorities, insurers, healthcare providers,
and others to contain and reduce healthcare costs;
• the impact on hospital, clinic, and nursing home services of the treatment
of patients in alternative or lower acuity healthcare settings, such as
with drug therapy, in surgery centers, and urgent care centers, retirement
homes or at home;
• changes in medical and other technology;
• changes in estimates of self-insurance claims and reserves;
• increases in prices of materials and services utilized in our Healthcare
Services and Pharmacy segments;
• increases in wages as a result of inflation or competition for physician,
nursing, pharmacy, management, and staff positions;
• any impairment in our ability to collect accounts receivable, including
deductibles and co-pay amounts;
• the functionality of or costs with respect to our information systems for
our Healthcare Services and Pharmacy segments and our corporate office,
including both software and hardware;
• the availability of and competition from alternative drugs or treatments
to those provided by our Pharmacy segment;
• the restrictions, clawbacks, processes, and conditions relating to our
Pharmacy segment imposed by pharmacy benefit managers, drug manufacturers,
and distributors; and
• the ability of our Pharmacy segment to sustain its claims for exemption
from sales taxes position in Louisiana on any revenue from sales of
products and services to beneficiaries of government insurance programs to
the extent reimbursed by administrators of such programs.
16--------------------------------------------------------------------------------
Liabilities, Claims, Obligations and Other Matters
• claims under leases, guarantees, disposition agreements, and other
obligations relating to asset sales or discontinued operations, including
claims from sold or leased facilities and services, retained liabilities
or retained subsidiaries;
• potential adverse consequences of any known and unknown government
investigations;
• claims for medical malpractice product, environmental or other liabilities
from continuing and discontinued operations;
• professional, general, and other claims which may be asserted against us,
including claims based on a failure currently unknown to us of our
physicians and other personnel to comply with COVID-19 vaccination
mandates;
• potential damages and consequences of natural disasters and
weather-related events such as tornados, earthquakes, hurricanes,
flooding, snow, ice and wind damage, and population evacuations affecting
areas in which we operate; and
• potential adverse contingencies of terrorist acts, crime or civil unrest.
Regulation and Governmental Activity
• negative consequences of existing and proposed governmental budgetary
constraints or modification or termination of existing government programs
or the implementation and related costs and disruptions of new government
programs such as environmental, social and governance programs;
• negative consequences of Federal and state insurance exchanges and their
rules relating to reimbursement terms;
• the continuing decision by Mississippi (where we operate our remaining
hospital and nursing home) to not expand Medicaid;
• the regulatory environment for our businesses, including state certificate
of need laws and regulations, pharmacy licensing laws and regulations,
rules and judicial cases relating thereto;
• changes in the levels and terms of government (including Medicare,
Medicaid and other programs) and private reimbursement for SunLink's
healthcare services including the payment arrangements and terms of
managed care agreements; indigent care and other reimbursements (Medicare
Upper Payment Limit "UPL" and Disproportionate Share Hospital "DSH"
adjustments) and governmental assessments for such programs;
• the failure of government and private reimbursement to cover our
increasing costs;
• changes in or failure to comply with federal, state or local laws and
regulations and enforcement interpretations of such laws and regulations
affecting our Healthcare Services and Pharmacy segments; and
• the possible enactment of additional federal healthcare reform laws or
reform laws in states where our subsidiaries operate hospital and pharmacy
facilities (including Medicaid waivers, bundled payments, managed care
programs, accountable care and similar organizations, competitive bidding
and other reforms).
17--------------------------------------------------------------------------------
Dispositions, Acquisition and Renovation Related Matters
• the ability to dispose of underperforming facilities, underperforming
business segments and surplus assets;
• the availability of cash and the terms of capital to fund acquisitions or
replacement facilities, improvements or renovations to existing facilities
or both; and
• competition in the market for acquisitions of hospitals, rehabilitation
centers, nursing homes, pharmacy facilities, and other healthcare
businesses.
The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could be additional factors besides those listed herein that also could affect SunLink in an adverse manner. You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Quarterly Report or our other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of SunLink.
We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based, except as required by applicable law. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the other risk factors set forth elsewhere in this report.
Business Strategy: Operations, Dispositions and Acquisitions
The business strategy of SunLink is to focus its efforts on improving its operations and services generally and achieving and maintaining profitability in its existing Healthcare Services and Pharmacy businesses. While the Company intends primarily to pursue its business strategy of improving its operations and services and achieving and maintaining profitability in its existing businesses, subject to available capital and other resources, the Company also intends to pursue growth by selective healthcare and pharmacy acquisitions. We believe; however, the COVID-19 pandemic and its aftermath has resulted in substantial additional uncertainties and risks in our businesses which are not subject to reliable estimation at this time, particularly because the COVID-19 is novel in nature, uncertain in duration, and materially affected by government actions related to the pandemic and its aftermath. In response to the pandemic, the Company has discontinued certain services, laid off or furloughed employees where necessary, reduced cash outlays where practicable, and deferred other strategic activities. Our ability to resume the pursuit of our normal business strategy, including growth initiatives, has been challenging and will depend on the effect of, among other things, the nature, extent and timing of the existing effects of COVID-19 pandemic, the end thereof, potential new COVID-19 or other pandemics, and government actions in response thereto.
The Company expects to use existing cash primarily to sustain it operations in response to the continuing impact of the COVID-19 pandemic, for growth initiatives, including acquisitions, when available and appropriate, and for other general corporate purposes. There is no assurance that any acquisitions or dispositions of assets will be authorized by the Company's Board of Directors or, if authorized, that any such transactions will be completed. Although the Company believes certain portions of its businesses continue to under-perform, and the Company periodically entertains overtures for the purchase of its businesses, the Company is not currently offering any of its businesses for sale.
COVID-19 Pandemic and CARES Act Funding
COVID-19 was declared a global pandemic by the
18
--------------------------------------------------------------------------------
government health and safety protocols and guidance issued in response to the COVID-19 pandemic, although such protocols and guidance have been subject to frequent changes and at times have been unclear. Nevertheless, as in many healthcare environments, we have experienced disruption of our operations, COVID-19 illness, including deaths, and some employees have tested positive and were placed on leave or in quarantine. We believe the effect of the COVID-19 pandemic and certain public and certain governmental responses to it have negatively affected our last eleven quarter's results.
In late
In our Healthcare Segment business, we have experienced material reductions in demand and net revenues due to the COVID-19 pandemic and its aftermath. There continues to be reduced current demand for certain hospital services and for extended care, rehabilitation center and nursing home admissions and clinic visits. The availability and cost of medical supplies have adversely affected our Healthcare businesses and we continue to monitor supplies and seek additional sources of many supply items. A reduction in the availability of qualified employees accompanied by an increase in the levels of salaries, wages and benefits have occurred, and, despite good faith efforts to do so, we have not yet been able to rehire or fully replace staff reductions which were previously furloughed, laid off or retired.
During the COVID-19 pandemic and aftermath, our Pharmacy business has
experienced reduced sales trends in certain areas, increased costs and reduced
staff. Many of our primary physician referral sources have been operating at
reduced capacity, and until these referral sources resume operating at full
capacity, we believe the COVID-19 pandemic will have continuing to effects on
the demand for DME products and
Our Healthcare and Pharmacy segments have received approximately
During the quarter ended
PRF distributions are subject to Federal audits and Single Audits and not subject to repayment provided we are able to attest to and comply with the terms and conditions of the funding, including demonstrating that the funds
19
--------------------------------------------------------------------------------
received have been used for designated, allowable healthcare-related expenses
and capital expenditures attributable to COVID-19 and for "Lost Revenues" as
defined by the department of "HHS". We continue to monitor compliance with the
terms and conditions of the PRF and developing interpretations and enforcement
of PRF rules and regulations, as well as the impact of the pandemic on our
revenues and expenses. If we are unable to attest to or comply with current or
future terms and conditions, and there is no assurance we will be able to do so,
our ability to retain some or all of the PRF received may be impacted, and we
may have to return the unutilized portion of those funds, if any, in the future.
The Company filed its Schedule of Grant Income of HHS awards and audit
report for the year ended
The Company is unable to determine the extent to which the COVID-19 pandemic and its aftermath will continue to affect its assets and operations. Our ability to make estimates of the effect of the COVID-19 pandemic on revenues, expenses or changes in accounting judgments that have had or are reasonably likely to have a material effect on our financial statements is currently limited. The nature and extent of the continuing effect of the COVID-19 pandemic and its aftermath on our balance sheet and results of operations will depend on the severity and length of the pandemic or to evolving strains of COVID-19; any further government actions to address the pandemic's continuing effect; regulatory changes in response to the pandemic, especially those that affect our hospital, extended care, rehabilitation center, nursing home, clinics, and our pharmacy operations; existing and potential government assistance that may be provided; and the requirements of PRF receipts, including our ability to retain such PRF received.
For additional discussion of the risks presented by continuing effects of the COVID-19 pandemic to our results, see Risk Factors in Part II, Item 1A of this Form 10-Q.
Critical Accounting Estimates
The preparation of financial statements in accordance with
Our critical accounting estimates are more fully described in our 2022 Annual Report on Form 10-K and continue to include the following areas: receivables - net and provision for doubtful accounts; revenue recognition and net patient service revenues; goodwill, intangible assets and accounting for business combinations; professional and general liability claims; and accounting for income taxes. There have been no material changes in our critical accounting estimates for the periods presented other than amounts readily computable from the financial statements included in this form 10-Q.
Financial Summary
The Company's operations for the three months ended
20
--------------------------------------------------------------------------------
costs and supply chain challenges resulting in inability to obtain pharmacy and DME products on a timely, cost effective basis.
The results of continuing operations shown in the financial summary below are for our two business segments, Healthcare Services and Pharmacy.
Three Months Ended
September 30,
2022 2021 % Change
Net Revenues - Healthcare Services $ 3,784 $ 3,498 8.2 %
Net Revenues - Pharmacy 7,253 7,027 3.2 %
Total Net Revenues 11,037 10,525 4.9 %
Costs and expenses (12,650 ) (11,518 ) 9.8 %
Operating loss (1,613 ) (993 ) 62.4 %
Interest income (expense) - net (4 ) (14 ) (71.4 )%
Federal stimulus - Provider relief funds 61 0 NA
Forgiveness of PPP loans and accrued interest 0 3,010 NA
Gain on sale of assets 12 5 140.0 %
Earnings (loss) from continuing operations
before income taxes $ (1,544 ) $ 2,008 NA
Results of Operations
Our net revenues are from our two business segments, Healthcare Services and
Pharmacy. The Company's revenues by payor were as follows for the three months
ended
Three Months Ended
September 30,
2022 2021
Medicare $ 5,013 $ 5,055
Medicaid 2,856 2,368
1,385 1,320
Self-pay 259 184
Other 25 31
Total Net Revenues $ 11,037 $ 10,525 The Healthcare Services segment in the current year is composed of one hospital,
one extended care and rehabilitation center and four clinics, a subsidiary which
provides information technology services to outside customers and SunLink
subsidiaries and two subsidiaries holding undeveloped real estate. Healthcare
Services net revenues increased
Pharmacy segment net revenues for the three months period ended
21
--------------------------------------------------------------------------------
Costs and expenses, including depreciation and amortization, were
Cost and Expenses
as a % of Net Revenues
Three Months Ended
September 30,
2022 2021
Cost of goods sold 39.6 % 38.7 %
Salaries, wages and benefits 48.3 % 44.6 %
Supplies 3.1 % 2.9 %
Purchased services 9.4 % 8.2 %
Other operating expenses 9.9 % 10.3 %
Rent and lease expense 1.1 % 1.6 %
Depreciation and amortization expense 3.3 % 3.2 %
Cost of goods sold as a percent of net revenues increased 0.9% in the three
months ended
Operating Loss
The Company reported an operating loss of
Forgiveness of PPP loans and accrued interest
During the three months ended
Other Income - Federal Stimulus - Provider relief funds
As part of the CARES Act, two subsidiaries have received PRF payments. The
Company recognized
Income Taxes
No income tax expense and income tax expense of
Of the CARES Act provisions, the currently most material income tax
considerations related to the Company are related to the amounts for ERC and
amounts received as general and targeted PRF. Based on the latest published
22
--------------------------------------------------------------------------------
forgiven PPP loan proceeds. It is the Company's assumption at
The principal negative evidence that led us to determine at
For federal income tax purposes, at
Earnings (Loss) from Continuing Operations after Income Taxes
The loss from continuing operations after income tax was
Loss from Discontinued Operations after Income Taxes
The loss from discontinued operations after income taxes was
Discontinued Operations
Life Sciences and Engineering Segment -SunLink retained a defined benefit
retirement plan which covered substantially all of the employees of this segment
when the segment was sold in fiscal 1998. Effective
Net Earnings (Loss)
Net loss for the three months period ended
23
--------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
Our primary source of liquidity is unrestricted cash on hand, which was
CARES Act Funds - The CARES Act was enacted by the
Subject to the effects, risks and uncertainties associated with the COVID-19 pandemic and our ability to retain the CARES funds described above, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months.
Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to outstanding
debt, noncancelable operating leases and interest on outstanding debt from
continuing operations at
Interest on
Payments Long-Term Operating Outstanding
due within: Debt Leases Debt
1 year $ 41 $ 359 $ 1
2 years 3 351 0
3 years 0 327 0
4 years 0 124 0
5 years 0 11 0
Over 5 years 0 0 0
$ 44 $ 1,172 $ 1
As of
The Company expects to purchase approximately
24
--------------------------------------------------------------------------------
materials, price increases or inventory adjustments, beyond those discussed herein); however, we are unable to predict with any degree of accuracy when, or the extent to which, recent inflationary price trends, labor disruptions and supply chain challenges in 2021 and 2022 will mitigate.
Related Party Transactions
A director of the Company is a member of a law firm which provides services to
SunLink. The Company expensed an aggregate of
© Edgar Online, source
