SUNLINK HEALTH SYSTEMS, INC. This Annual Report and the documents that are incorporated by reference in this Annual 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. For a listing and a discussion of such factors, which could cause actual results, performance and achievements to differ materially from those anticipated, see Certain Cautionary Statements-Forward Looking Information and Item 1A.
Critical Accounting Estimates
The preparation of financial statements in accordance withU.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:
• it requires assumptions to be made that were uncertain at the time the
estimate was made; and
• changes in the estimate or different estimates that could have been made
could have a material impact on our consolidated statement of earnings or
financial condition.
The table of critical accounting estimates that follows is not intended to be a comprehensive list of all of our accounting policies that require estimates. We believe that of our significant accounting policies, as discussed in Note 2 of our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 , the estimates discussed below involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and financial condition. 34
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The table that follows presents information about our critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate:
Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Assumption / Approach Used Critical Estimate Item (dollar amounts in thousands, except Sensitivity Analysis (dollar amounts in thousands, except per (dollar amounts in thousands, except per share) share) per share) Receivables-net and Provision for Concession Adjustments Receivables-net for our Healthcare The largest component of concessions A significant increase in our Services segment primarily consists of adjustments in our patient accounts provision for doubtful accounts (as amounts due from third-party payors receivable for our Healthcare a percentage of revenues) would and patients from providing healthcare Services and Pharmacy segments lower our earnings. This would services to healthcare facility relates to accounts for which adversely affect our results of patients. Receivables for our Pharmacy patients are responsible, which we operations, financial condition, segment primarily consists of amounts refer to as patient responsibility liquidity and potentially our future due from third-party payors; accounts. These accounts include access to capital. institutions such as extended care and both amounts payable by uninsured If net revenues during fiscal year rehabilitation centers, nursing homes, patients and co-payments and 2022 were changed by 1%, our 2022 home health, hospice, hospitals; deductibles payable by insured after-tax income from continuing Medicaid Part D program; and customers patients. In general, we attempt to operations would change by from the sale of pharmacy services and collect deductibles, co-payments and approximately$413 or diluted merchandise. Our ability to collect self-pay accounts prior to the time earnings per share of$0.06 . outstanding receivables is critical to of service for non-emergency care. This is only one example of our results of operations and cash If we do not collect these patient reasonably possible sensitivity flows. The primary uncertainty lies responsibility accounts prior to the scenarios. The process of with accounts for which patients are delivery of care, the accounts are determining the allowance requires responsible, which we refer to as handled through our billing and us to estimate uncollectible patient patient responsibility accounts. These collections processes. accounts that are highly uncertain accounts include both amounts payable We attempt to verify each patient's and requires a high degree of by uninsured patients and co-payments insurance coverage as early as judgment. It is impacted by, among and deductibles payable by insured possible before a scheduled other things, changes in regional patients. non-emergency admission or
economic conditions, business office
procedure, including with respect to operations, payor mix and trends in
Our provision for concession eligibility, benefits and private and federal or state
adjustments, included in our results authorization/pre-certification
governmental healthcare coverage.
of continuing operations for the years requirements, in order to notify
ended
patients of the estimated amounts
2022-$967; and for which they will be responsible.
2021-$726 Our hospital does not operate an
emergency room. We attempt to verify
insurance coverage within a
reasonable amount of time for all
non-emergency urgent admissions in
compliance with the Emergency
Medical Treatment and Active Labor
Act.
In general, we utilize the following
steps in collecting accounts
receivable: if possible, cash
collection of all or a portion of
deductibles, co-payments and
self-pay accounts prior to or at the
time service is provided; billing
and follow-up with third party
payors; collection
calls; utilization of collection
agencies; sue to collect if the
patient has the means to pay and
chooses not to pay; and if
collection efforts are unsuccessful,
write off the accounts.
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Balance Sheet or Statement of
Operations and Comprehensive
Earnings and Loss Caption/Nature of Assumption / Approach Used
Critical Estimate Item (dollar amounts in thousands, except Sensitivity Analysis
(dollar amounts in thousands, except per (dollar amounts in thousands, except
per share) share) per share)
Our policy is to write off accounts
after all collection efforts have
failed, which is typically no longer
than 120 days after the date of
discharge of the patient or service
to the patient or customer. Patient
responsibility accounts represent
the majority of our write-offs. Our
subsidiary hospital retains
third-party collection agencies for
billing and collection of delinquent
accounts; the use of one or more
collection agencies promotes
competition and improved
performance. Generally, we do not
write off accounts prior to
utilizing the services of a
collection agency. Once collection
efforts have proven unsuccessful, an
account is written off from our
patient accounting system.
We monitor our revenue trends by
payor classification on a
quarter-by-quarter basis along with
the composition of our accounts
receivable agings. This review is
focused primarily on trends in
self-pay revenues, self-pay accounts
receivable, co-payment receivables
and historic payment patterns.
In addition, we analyze other
factors such as day's revenue in
accounts receivable and we review
admissions and charges by
physicians, primarily focusing on
recently recruited physicians.
36-------------------------------------------------------------------------------- Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Assumption / Approach Used Critical Estimate Item (dollar amounts in thousands, Sensitivity Analysis (dollar amounts in thousands, except except per (dollar amounts in thousands, except per share) share) per share) Revenue recognition /Net Patient Service Revenues
For our Healthcare Services segment, Revenues are recorded at estimated we recognize revenues in the period amounts due from patients, third- in which services are provided. For party payors, institutions, and our Pharmacy segment, we recognize others for healthcare and pharmacy revenues in the period in which services and goods provided net of services are provided and at the time contractual discounts pursuant to the customer takes possession of contract or government payment merchandise. Patient receivables rates. Estimates for contractual primarily consist of amounts due from allowances are calculated using third-party payors and patients. computerized and manual processes Amounts we receive for treatment of depending on the type of payor patients covered by governmental involved. In our hospital, the programs, such as Medicare and contractual allowances are Medicaid, and other third-party calculated by a computerized payors, such as HMOs, PPOs and other system based on payment terms for private insurers, are determined each payor and certain manual pursuant to contracts or established estimates are used in calculating government rates and are generally contractual allowances based on less than our established billing historical collections from payors rates. Accordingly, our gross
that are not significant or have
revenues and patient receivables are not entered into a contract with reduced to net amounts receivable us. All contractual adjustments pursuant to such contracts or
regardless of type of payor or
government payment rates through an method of calculation are reviewed
allowance for contractual discounts. and compared to actual experience
The sources of these revenues were as on a periodic basis.
follows for the year ended
party payors, institutions, and
Medicare-48.4%; patients. Amounts we receive for
Medicaid-25.4%; and the treatment of patients covered
Commercial insurance and other by HMOs, PPOs and other private
sources-8.8%. insurers are generally less than
our established billing rates. We
include contractual allowances as
a reduction to revenues in our
financial statements based on
payor specific identification and
payor specific factors for rate
increases and denials.
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Balance Sheet or Statement of
Operations and Comprehensive
Earnings and Loss Caption/Nature Assumption / Approach Used
of Critical Estimate Item (dollar amounts in Sensitivity Analysis
(dollar amounts in thousands, thousands, except per (dollar amounts in thousands, except
except per share) share) per share)
Governmental payors Governmental payors
The majority of services Because the laws and regulations
performed on Medicare and governing the Medicare and Medicaid
Medicaid patients are programs are complex and subject to
reimbursed at predetermined change, the estimates of contractual
reimbursement rates. discounts we record could change by
material amounts. Adjustments
The differences between the related to final settlements for
established billing rates revenues retrospectively increased
(i.e., gross charges) and (decreased) our revenues from
the predetermined continuing operations by the
reimbursement rates are following amounts for the years
recorded as contractual ended June 30 :
discounts and deducted from 2022-$33 and
gross charges. Under this 2021-$69.
prospective reimbursement
system, there is no
adjustment or settlement of
the difference between the
actual cost to provide the
service and the
predetermined reimbursement
rates.
Discounts for
retrospectively cost-based
revenues are estimated
based on historical and
current factors and are
adjusted in future periods
when settlements of filed
cost reports are received.
Final settlements under all
programs are subject to
adjustment based on
administrative review and
audit by third party
intermediaries, which can
take several years to
resolve completely.
Commercial Insurance Commercial Insurance
For most managed care If our overall estimated contractual
plans, contractual discount percentage on all of our
allowances estimated at the commercial revenues during 2022 were
time of service are changed by 1%, our 2022 after-tax
adjusted to actual income from continuing operations
contractual allowances as would change by approximately $95 .
cash is received and claims This is only one example of
are reconciled. reasonably possible sensitivity
scenarios. The process of
We evaluate the following determining the allowance requires
criteria in developing the us to estimate the amount expected
estimated contractual to be received and requires a high
allowance percentages: degree of judgment. It is impacted
historical contractual bychanges in managed care contracts
allowance trends based on and other related factors.
actual claims paid by A significant increase in our
managed care payors; review estimate of contractual discounts
of contractual allowance wouldlower our earnings. This would
information reflecting adversely affect our results of
current contract terms; operations, financial condition,
consideration and analysis liquidity and future access to
of changes in payor mix capital.
reimbursement levels; and
other issues that may
impact contractual
allowances.
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Balance Sheet or Statement of Operations and Comprehensive Assumption / Approach Earnings and Loss Caption/Nature
Used
of Critical Estimate Item (dollar amounts in Sensitivity Analysis
(dollar amounts in thousands, thousands, except per (dollar amounts in thousands, except
except per share) share) per share)
Intangible assets and accounting
for business combinations
Our intangible assets by business In accordance with segment included in our
Financial Accounting
consolidated balance sheets as of Standards Board
June 30 for the following years ("FASB") Accounting
was as follows: Standards Codification
350-10,
"Intangibles-Goodwill
and Other," ("ASC
350-10") goodwill and
intangible assets with
indefinite lives are
reviewed by us at least
annually for
impairment. For
purposes of these
analyses, the estimate
of fair value is based
on the income approach,
which estimates the
fair value based on
future discounted cash
flows. The estimate of
future discounted cash
flows is based on
assumptions and
projections that are
believed to be
currently reasonable
and supportable. If it
is determined the
carrying value of
goodwill or other
intangible assets to be
impaired, then the
carrying value is
reduced.
The purchase price of
acquisitions is
allocated to the assets
acquired and
liabilities assumed
based upon their
respective fair values
and are subject to
change during the
twelve-month period
subsequent to the
acquisition date. We
engage independent
third-party valuation
firms to assist us in
determining the fair
values of assets
acquired and
liabilities assumed at
the time of
acquisition. Such
valuations require us
to make significant
estimates and
assumption, including
projections of future
events and operating
performance.
2022 2021
Pharmacy
Trade name $ 1,180 $ 1,180
Customer relationships 1,089 1,089
Medicare License 623 623
2,892 2,892
Accumulated amortization (1,691) (1,665)
Total $ 1,201 $ 1,227
39
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Balance Sheet or Statement of
Operations and Comprehensive
Earnings and Loss Caption/Nature of
Critical Estimate Item Assumption / Approach Used Sensitivity Analysis
(dollar amounts in thousands, except (dollar amounts in thousands, (dollar amounts in thousands, except
per share) except per share) per share)
Fair value estimates are derived
from independent appraisals,
established market values of
comparable assets, or internal
calculations of estimated future
net cash flows. Our estimate of
future cash flows is based on
assumptions and projections we
believe to be currently
reasonable and supportable. Our
assumptions take into account
revenue and expense growth
rates, patient volumes, changes
in payor mix, and changes in
legislation and other payor
payment patterns.
Professional and general liability
claims
We are subject to potential medical The reserve for professional and Actuarial calculations include a
malpractice lawsuits and other general liability claims is large number of variables that may
claims as part of providing based upon independent actuarial significantly impact the estimate of
healthcare and pharmacy related calculations, which consider ultimate losses recorded during a
services. To mitigate a portion of historical claims data, reporting period. In determining
this risk, we have maintained demographic considerations, loss estimates, professional
insurance for individual malpractice severity factors and other judgment is used by each actuary by
claims exceeding a self-insured actuarial assumptions in the selecting factors that are
retention amount. Our self-insurance determination of reserve considered appropriate by the
retention amount was $1,000 on estimates. actuary for our specific
individual malpractice claims for circumstances. Changes in
each contract year commencing The reserve for professional and assumptions used by our independent
March 1, 2011 through February 29, general liability claims actuary with respect to demographics
2016 and was reduced to $750 from reflects the current estimate of and geography, Industry trends,
March 1, 2016 through March 31, all outstanding losses, development patterns and judgmental
2021. A tail insurance policy has including incurred but not selection of other factors may
been purchased for claims occurring reported losses, based upon impact our recorded reserve levels
on or before March 31, 2021 which actuarial calculations as of the and our results of operations.
has a $750 per incident self-insured balance sheet date. The loss Changes in our initial estimates of
retention. For claims occurring estimates included in the professional and general liability
after March 31, 2021, claims made actuarial claims are non-cash charges and
insurance policies have been calculations may change in the accordingly, there would be no
purchased with $1,000 on individual future based upon updated facts material impact currently on our
malpractice claims for the contract and circumstances. liquidity or capital resources.
years commencing April 1, 2021
through March 31, 2023. We revise our reserve estimation
process by obtaining independent
Each year, we obtain quotes from actuarial calculations
various malpractice insurers with quarterly.
respect to the cost of obtaining
medical malpractice insurance
coverage. We compare these quotes to
our most recent actuarially
determined estimates of losses at
various self-insured retention
levels. Accordingly, changes in
insurance costs affect the
self-insurance retention level we
choose each year. As insurance costs
increase, we may accept a higher
level of risk in self-insured
retention levels.
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Balance Sheet or Statement of Operations and Comprehensive Assumption / Approach Earnings and Loss Caption/Nature
Used
of Critical Estimate Item (dollar amounts in Sensitivity Analysis
(dollar amounts in thousands, thousands, except (dollar amounts in thousands, except
except per share) per share) per share)
The reserve for professional and Our estimated reserve
general liability claims included for
in our consolidated balance sheets professional and general
as of June 30 was as follows: liability claims will be
2022-$111 and significantly affected
2021-$37 if current and future
The total increases for claims differ from
professional and general liability historical trends. While coverage, included in our
we monitor reported
consolidated results of operations claims closely and
for the years ended June 30 , was consider potential
as follows: outcomes as estimated by
2022-$454; and our independent
2021-$211. actuaries when
determining our
professional and general
liability reserves, the
complexity of the
claims, the extended
period of time to settle
the claims and the wide
range of potential
outcomes complicates the
estimation process. In
addition, certain
states, including
Georgia , have passed
varying forms of tort
reform which attempt to
limit the number and
types of claims and the
amount of some medical
malpractice awards. If
enacted limitations
remain in place or if
similar laws are passed
in the states where our
other medical facilities
are located, our loss
estimates could
decrease.
Conversely,
liberalization of the
number and type of
claims and damage awards
permitted under any such
law applicable to our
operations could cause
our loss estimates to
increase.
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Balance Sheet or Statement of Operations and Comprehensive Assumption / Approach Earnings and Loss Caption/Nature
Used
of Critical Estimate Item (dollar amounts in Sensitivity Analysis
(dollar amounts in thousands, thousands, except (dollar amounts in thousands, except
except per share) per share) per share)
Accounting for income taxes
Deferred tax assets generally The first step in Our deferred tax assets were
June 30, 2022, excluding the impact of
in a tax deduction in future years deferred tax asset valuation allowances. At June 30, 2022,
for which we have already recorded valuation allowance is the Company evaluated the need for a
the tax benefit in our Statement identifying reporting valuation allowance against our
of Operations and Comprehensive jurisdictions where we deferred tax assets and determined that
Earnings and Loss. We assess the have a history of tax it was more likely than not that
likelihood that deferred tax and operating losses or none of our deferred tax assets would
assets will be recovered from are projected to have be realized. As a result, in
future taxable income. To the losses in future accordance with ASC 740, we recognized
extent we believe that recovery is periods as a result of a total valuation allowance of $7,919
not probable, a valuation changes in operational against the deferred tax asset so that
allowance is established. To the performance. We then the net tax deferred asset was $0 at
extent we establish a valuation determine if a June 30, 2022. We conducted our
allowance or increase this valuation allowance evaluation by considering available
allowance, we must include an should be established positive and negative evidence to
expense as part of the income tax against the deferred determine our ability to realize our
provision in our results of tax assets for that deferred tax assets. In our evaluation,
operations. Our net deferred tax reporting jurisdiction. we gave more significant weight to
asset (liability) balance (net of evidence that was objective in nature
valuation allowance) in our The second step is to as compared to subjective evidence.
consolidated balance sheets as of determine the amount of Also, more significant weight was given
June 30 for the following years the valuation to evidence we judged directly related
was as follows: allowance. We will to our current financial performance as
2022-$(69); and generally establish a compared to less current evidence and
2021-$0. valuation allowance future plans.
Our valuation allowances for equal to the net The
deferred tax asset items we have failed to identify as tax
consolidated balance sheets as of (deferred tax assets contingencies. If the IRS were to
June 30 for the following years less deferred tax propose and sustain assessments equal
were as follows: liabilities) related to to 10% of our taxable income for 2022,
2022-$7,919; and the jurisdiction we would incur approximately $0 of
2021-$6,700. identified in the first additional tax expense for 2022 plus
In addition, significant judgment step of the analysis. applicable penalties and interest.
is required in determining and In certain cases, we
assessing the impact of certain may not reduce the
tax-related contingencies. We valuation allowance by
establish accruals when, despite the amount of the
our belief that our tax return deferred tax
positions are fully supportable, liabilities depending
it is probable that we have on the nature and
incurred a loss related to tax timing of future
contingencies and the loss or taxable income
range of loss can be reasonably attributable to
estimated. deferred tax
We adjust the accruals related to liabilities.
tax contingencies as part of our
provision for income taxes in our In assessing tax
results of operations based upon contingencies, we
changing facts and circumstances, identify tax issues
such as the progress of a tax that we believe may be
audit, development of industry challenged upon
related examination issues, as examination by the
well as legislative, regulatory or taxing authorities. We
judicial developments. A number of also assess the
years may elapse before a likelihood of
particular matter, for which we sustaining tax benefits
have established an accrual, is associated with tax
audited and resolved. planning strategies and
reduce tax benefits
based on management's
judgment regarding such
likelihood. We compute
the tax on each
contingency. We then
determine the amount of
loss, or reduction in
tax benefits based upon
the foregoing and
reflects such amount as
a component of the
provision for income
taxes in the reporting
period.
During each reporting
period, we assess the
facts and circumstances
related to recorded tax
contingencies. If tax
contingencies are no
longer deemed probable
based upon new facts
and circumstances, the
contingency is
reflected as a
reduction of the
provision for income
taxes in the current
period.
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Financial Summary
The results of continuing operations shown in the historical summary below are for our two business segments, Healthcare Services and Pharmacy.
2022 2021
Net Revenues-Healthcare Services$ 13,409 $ 13,613 Net Revenues-Pharmacy 27,935 27,072 Total Net Revenues 41,344 40,685 Costs and expenses (46,684 ) (38,814 ) Operating profit (loss) (5,340 ) 1,871 Federal stimulus - Pandemic relief funds 720
4,880
Forgiveness of PPP loans and accrued interest 3,010 264 Interest Expense (15 ) (28 ) Gain on sale of assets 10 13 Earnings (loss) from continuing operations before income taxes$ (1,615 ) $
7,000
Healthcare Services segment: Hospital and Extended Care and Rehabilitation Center Admissions
528 281
Hospital andExtended Care and Rehabilitation Center Patient Days 22,165 19,577 Results of Operations
Our net revenues are principally from our two business segments, Healthcare
Services and Pharmacy. The Company's net revenues by payor were as follows for
the years ended
2022 2021
Medicare $ 20,025 $ 18,194
Medicaid 10,493 10,522
Retail and Institutional Pharmacy 5,879 6,090
Managed Care & Other Insurance 3,642 5,094
Self-pay 1,199 510
Other 106 275
Total Net Revenues $ 41,344 $ 40,685
Healthcare Services net revenues in the current year are composed of revenues
from its hospital, clinics, extended care and rehabilitation center, and a
subsidiary which provides information technology services to outside customers
and SunLink subsidiaries. Healthcare Services net revenues decreased $204 , or
1.5% in the year ended June 30, 2022 compared to the year ended June 30, 2021 .
The decrease in net revenues for fiscal 2022 resulted from primarily from
decreased extended care and rehabilitation center revenues due to unfavorable
payer mix. Hospital days increased 42.9%, extended care and rehabilitation
center patient days increased 7.4% and clinic visits increased 34.4% in the
fiscal year ended June 30, 2022 compared to the prior year. Settlements of prior
year Medicare and Medicaid cost reports contributed net revenues from continuing
operations of $33 for the year ended June 30, 2022 and $69 for the year ended
June 30, 2021 .
Pharmacy Segment net revenues for the year ended June 30, 2022 of $27,935
increased 3.2% from the prior year. The increased net revenues resulted from
increased demand compared to the COVID-19 pandemic period of the year ended June
20, 2021 . Total scripts filled increased 1.8% and Durable Medical Equipment
("DME") sales orders increased 3.8% for the year ended June 30, 2022 from the
prior year. Retail and Institutional Pharmacy revenues increased for the year
ended June 30, 2022 from the prior year while, although DME sales orders
increased, DME revenues decreased 1.5% due to the difficulty of purchasing
certain higher margin DME products as a result of supply chain issues.
43
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Costs and expenses, including depreciation and amortization, were $46,684 and
$38,814 for the fiscal years ended June 30, 2022 and 2021, respectively. Costs
and expenses as a percentage of net revenues were:
2022 2021
Cost of goods sold 39.7 % 38.4 %
Salaries, wages and benefits 46.0 % 33.9 %
Supplies 3.1 % 2.4 %
Purchased services 8.6 % 6.1 %
Other operating expenses 10.5 % 9.9 %
Rent and lease expense 1.3 % 1.4 %
Depreciation and amortization expense 3.7 % 3.4 %
Cost of goods sold as a percent of net revenues increased 1.3% in the fiscal year endedJune 30, 2022 compared to the prior fiscal year due to the higher cost of certain pharmaceuticals and DME products which resulted from supply chain issues. Salaries, wages and benefits expense as a percent of net revenues increased 12% this year compared to the prior fiscal year due to higher salaries and wages required in connection with current labor markets and operating challenges of labor allocation relating to the pandemic, including the use of contract labor, and recognition last year of$3,586 CARES Act Employer Retention Credits ("ERC") which the company qualified for when the program was amended effectiveJanuary 1, 2021 . ERC were recognized as reductions of salaries, wages and benefits. Purchased services cost increased this year due to increased cost of fuel, outsourcing at our Healthcare Services facility of certain services (due to challenges in hiring labor locally) and increased costs of software support services. Other operating expenses increased 0.6% of net revenues due to increased professional liability and other insurance expenses. Operating loss was$5,340 for the year endedJune 30, 2022 compared to operating profit of$1,871 for the year endedJune 30, 2021 . The operating loss in the year endedJune 30, 2022 compared to the prior fiscal year resulted from increased cost of certain Pharmacy segments products, increased salaries, wages and benefit, purchased services, supplies and other expense this year, and the non-recurrence of ERC of$3,586 in the current fiscal year.
Forgiveness of PPP loan and accrued interest
During the year endedJune 30, 2022 ,$2,972 of our PPP loans and related$38 of accrued interest were forgiven by the SBA and recorded as income relating to the PPP loan forgiveness compared to$261 of PPP loans and$3 of accrued interest for the year endedJune 20, 2021 . As ofJune 30, 2022 , all PPP loans were forgiven by the SBA.
Other Income - Federal stimulus - Pandemic relief funds
As part of CARES, two subsidiaries received total payments of$6,173 under theProvider Relief Fund ("PRF"). The Company recognized income when it was able to comply with the relevant conditions of the grants. During the fiscal year endedJune 30, 2022 ,$720 of these funds were recognized as Other Income for reimbursement of Lost Revenues and for COVID-19 related expenses compared to$4,880 for the fiscal year endedJune 30, 2021 .
Interest Expense-net
Interest expense, net was
Income Taxes We recorded income tax expense of$107 ($60 federal and$47 state tax expense) for the year endedJune 30, 2022 compared to an income tax expense of$63 ($63 state tax expense) for the year endedJune 30, 2021 . Of the CARES Act provisions, the 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 publishedIRS guidance as of the preparation of theJune 30, 2022 financial statements, PRF (to the extent the applicable terms and conditions required to retain the funds are met "Retainable PRF") are fully includable in taxable income in the Company's tax returns in the fiscal year received. ERC are included in tax income in the Company's tax returns in the quarter in which the payroll expenses for which the credits offset are deductible. ERC results in qualified wages being disallowed as a deduction for the portion of the wages paid equal to the sum of the payroll tax credit taken in the associated quarter. For amounts received and forgiven under the PPP loans, due to the enactment of the Consolidated Appropriations Act, 2021, onDecember 27, 2020 ,Congress specifically allows the deduction of any expenses associated with 44
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forgiven PPP loan proceeds. It is the Company's assumption at
In accordance with the Financial Accounting Standards Board Accounting Standards
Codification ("ASC") 740, we evaluate our deferred taxes quarterly to determine
if adjustments to our valuation allowance are required based on the
consideration of available positive and negative evidence using a "more likely
than not" standard with respect to whether deferred tax assets will be realized.
Our evaluation considers, among other factors, our historical operating results,
our expectation of future results of operations, the duration of applicable
statuary carryforward periods and conditions of the healthcare industry. The
ultimate realization of our deferred tax assets depends primarily on our ability
to generate future taxable income during the periods in which the related
temporary differences in the financial basis and the tax basis of the assets
become deductible. The value of our deferred tax assets will depend on
applicable income tax rates.
The principal negative evidence that led us to determine at June 30, 2022 that
all the deferred tax assets should have full valuation allowances was the
projected current fiscal year tax loss disregarding unusual items associated
with the CARES Act discussed above, history of losses as well as the underlying
negative business conditions for rural healthcare businesses in which our
Healthcare Services Segment businesses operate and the Federal income tax net
operating loss carry-forward of approximately $21,653 .
For Federal income tax purposes, at June 30, 2022 , the Company had approximately
$21,653 of estimated net operating loss carry-forwards available for use in
future years subject to the limitations of the provisions of Internal Revenue
Code Section 382. These net operating loss carryforwards expire primarily in
fiscal 2023 through fiscal 2038; however, with the enactment of the Tax Cut and
Jobs Act on December 22, 2017 , federal net operating loss carryforwards
generated in taxable years beginning after December 31, 2017 now have no
expiration date. The Company's returns for the periods prior to the fiscal year
ended June 30, 2019 are no longer subject to potential federal and state income
tax examination.
Discontinued Operations
Loss from discontinued operations net of income tax was $287 for the year ended
June 30, 2022 , and loss from discontinued operations net of income taxes were
$47 for the year ended June 30, 2021 . The results of all the businesses in
discontinued operations are presented below:
Sold Hospitals - Subsidiaries of the Company have sold substantially all of the
assets of five hospitals ("Other Sold Hospitals") during the period July 2, 2012
to March 17, 2019 . The income before income taxes for the fiscal year ended June
30 , 2021of the Other Sold Hospitals resulted primarily from the positive effects
of prior year Medicare and Medicaid cost report settlements. The loss before
income taxes for the fiscal year ended June 30, 2020 resulted primarily from
retained professional liability claims expenses and from the negative effects of
prior year Medicare and Medicaid cost report settlements.
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 February 28, 1997 , the plan
was amended to freeze participant benefits and close the plan to new
participants. Pension expense and related tax benefit or expense is reflected in
the results of operations for this segment for the fiscal years ended June 30,
2022 and 2021.
Discontinued Operations-Summary Statement of Earnings Information
2022 2021
Net Revenues:
Sold Hospitals $ 24 $ 191
$ 24 $ 191
Earnings (Loss) before Income Taxes:
Sold Hospitals $ (243 ) $ 33
Life sciences and engineering (44 ) (80 )
Earnings (loss) before income taxes (287 ) (47 )
Income tax expense 0 0
Earnings (Loss) from discontinued operations
45-------------------------------------------------------------------------------- Net Earnings (Loss) - Net loss for the year endedJune 30, 2022 was$2,009 (or a loss of$0.29 per fully diluted share) compared to net earnings for the year endedJune 30, 2021 of$6,890 ($0.99 per fully diluted share).
Liquidity and Capital Resources
Overview
Our primary source of liquidity is unrestricted cash on hand, which was$6,794 atJune 30, 2022 . The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand. From time-to-time, nevertheless, we may seek to obtain financing for the liquidity needs or the Company or individual subsidiaries based on anticipated needs. However, currently, the Company believes, currently, that its ability to raise capital (debt or equity) in the public or private markets on what it considers acceptable terms is uncertain. CARES Act Funds- The CARES Act was enacted by theU.S. government onMarch 27, 2020 . Among the relief to health care providers under the CARES Act are grant of funds under PRF and forgivable loans under the PPP. We have received a total of$9,407 under the CARES Act programs consisting of$6,173 in general and targeted PRF and$3,234 of PPP loans. During the first two calendar quarters of 2021, the Company became eligible for, and we applied for$3,586 of ERC amended our quarterly payroll tax filing. Through the date of this filing, we have received$1,803 of ERC for which we filed amended payroll tax returns. Subject to the effects, risks and uncertainties associated with the COVID-19 pandemic and our right to retain the CARES described above, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months. 46
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Contractual Obligations, Commitments and Contingencies
Contractual obligations related to long-term debt, non-cancelable operating leases and interest on outstanding debt from continuing operations atJune 30, 2022 is shown in the following table. The interest on variable interest debt is calculated at the interest rate in effect atJune 30, 2022 . Interest on Payments Long-Term Long-Term due in: Debt Debt 1 year$ 40 $ 3 2 years 14 0 3 years 0 0 4 years 0 0 5 years 0 0 More than 5 years 0 0$ 54 $ 3
Long-term Debt -At
AtJune 30, 2022 , the Company has approximately$350 of commitments for future capital expenditures for our Trace hospital under its Trace Forward Capital Plan which was announced inMarch 2021 . This Plan expands, upgrades and improves the physical plant, patient care, ancillary services and support areas of the Trace hospital. The Company also expects to purchase approximately$1,100 of additional capitalizable DME by the Pharmacy segment (to be rented to customers) during fiscal 2023. The timing and actual amount which will be expended is difficult to predict due to various factors including varying demand for such equipment as well as its availability given current supply sourcing challenges. The Company anticipates funding such expenditures primarily from cash on hand. The Company has$3,586 receivable from the filing of ERC claimed in amended payroll tax returns of which we have collected$1,802 . through the date of this filing. We expect to collect the remaining$1,839 receivable in the next 12 months. Other cash expenditures for the next 12 months currently are expected to be in-line with expenditures for the quarter endedJune 30, 2022 , subject to further operating and administrative cost increases, and other settlements of cost reports in the ordinary course of business, and the Company's ability to retain unrecognized CARES Act grants, PPP funds and ERC funds received or previously received.The Small Business Administration which administers PPP loans has requested certain additional information with regards to one of the forgiven PPP loans which we are in the process of supplying. Other than reported above, there have been no material changes outside the ordinary course of business relating to our upcoming cash obligations which have occurred during the nine months endedJune 30, 2022 . Other than with respect to scheduled cash expenditures (based on current operating levels) for long-term debt, operating leases, and interest on current outstanding debt, the debt, the specific items previously disclosed here, as well as continued uncertainties relating to the continuing impact of the COVID-19 pandemic, the Company is currently unaware of other trends or unusual uncertainties that are likely to cause a material change in its cash expenditures in periods beyond the next twelve months. See Notes 6, 9 and 13 to our financial statements. The Company is also unaware of events that are reasonably likely to cause a material change in the relationship between its costs and revenues (such as known or reasonably likely future increases in costs of labor or materials, price increases or inventory adjustments, beyond those discussed herein); however, we are unable to predict with any degree of accuracy whether, or the extent to which, recent inflationary price trends in 2021 and 2022 are transitory or reflect the beginning of an inflationary cycle, which would likely have continuing negative effects on our liquidity and results of operations. Related Party Transactions A director of the Company is a member of a law firm which provides services to SunLink. The Company has expensed an aggregate of$141 and$182 to the law firm in the fiscal years endedJune 30, 2022 and 2021, respectively. Included in the Company's consolidated balance sheets atJune 30, 2022 and 2021 is$15 and$21 of amounts payable to the law firm.
Inflation
During periods of inflation and labor shortages, employee salaries, wages and benefits increase and suppliers pass along rising costs to us in the form of higher prices for their supplies and services. We have limited ability to, and frequently are unable to, offset increases in operating costs by increasing prices for our services and products due to, among other things, our reliance on Medicare and Medicaid payments for a large proportion of our revenues or to implement sufficient cost control measures due to, among other things, our operations in a highly regulated industry. We are thus unable to predict our ability to control future cost increases or offset future cost increases by passing along the increased cost to customers.
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