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, 2020 , 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. 33
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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 nursing homes, both amounts payable by uninsured If net revenues during fiscal year home health, hospice, hospitals; patients and co-payments and 2020 were changed by 1%, our 2020 Medicaid Part D program; and customers deductibles payable by insured after-tax income from continuing from the sale of pharmacy services and patients. In general, we attempt to operations would change by merchandise. Our ability to collect collect deductibles, co-payments and approximately$476 or diluted outstanding receivables is critical to self-pay accounts prior to the time earnings per share of$0.07 . our results of operations and cash of service for non-emergency care. This is only one example of flows. The primary uncertainty lies If we do not collect these patient reasonably possible sensitivity with accounts for which patients are responsibility accounts prior to the scenarios. The process of responsible, which we refer to as delivery of care, the accounts are determining the allowance requires patient responsibility accounts. These handled through our billing and us to estimate uncollectible patient accounts include both amounts payable collections processes. accounts that are highly uncertain by uninsured patients and co-payments We attempt to verify each patient's and requires a high degree of and deductibles payable by insured insurance coverage as early as judgment. It is impacted by, among patients possible before a scheduled
other things, changes in regional
non-emergency admission or economic conditions, business office
Our provision for concession procedure, including with respect to operations, payor mix and trends in
adjustments, included in our results eligibility, benefits and private and federal or state
of continuing operations for the years authorization/pre-certification governmental healthcare coverage.
ended June 30, was as follows: requirements, in order to notify
2020-$784; and patients of the estimated amounts
2019-$817 for which they will be responsible.
We attempt to verify insurance
coverage within a reasonable amount
of time for all emergency room
visits and 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.
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HEALTHCARE SERVICES SEGMENT NET ACCOUNTS RECEIVABLE
JUNE 30, 2020
Days Outstanding 1
Payor Class 0 - 30 31 - 60 61 - 90 91 - 120 121 - 150 151 - 180 >180 Total
Medicare $ 525 $ 35 $ 52 $ 30 $ 23 $ 13 $ 48 $ 726
Medicaid 267 28 7 2 6 4 17 331
Commercial 216 32 9 11 7 11 39 325
Self Pay 27 23 17 16 16 26 96 221
$ 1,035 $ 118 $ 85 $ 59 $ 52 $ 54 $ 200 $ 1,603 1 The above table shows, as of
accounts receivable aged from patient date of service and are grouped by
classification of verified insurance coverage.
PHARMACY SEGMENT NET ACCOUNTS RECEIVABLE
JUNE 30, 2020
Days Outstanding 2
Payor Class 0 - 30 31 - 60 61 - 90 91 - 120 121 - 150 Total Medicare$ 365 $ 35 $ 59 $ 90 $ 79 $ 628 Medicaid 255 104 60 49 170 638 Private insurance and institutions 216 53 24 19 (21) 291 Private pay 925 163 115 32 (80) 1,155$ 1,761 $ 355 $ 258 $ 190 $ 148 $ 2,712
2 The above table shows, as of
receivable aged from the date of sale or services performed and are grouped
by classification of verified payor class.
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-41.9%; patients. Amounts we receive for
Medicaid-29.2%; and the treatment of patients covered
Commercial insurance and other by HMOs, PPOs and other private
sources-14.1%. 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
The differences between the material amounts. Adjustments
established billing rates related to final settlements for
(i.e., gross charges) and revenues retrospectively increased
the predetermined (decreased) our revenues from
reimbursement rates are continuing operations by the
recorded as contractual following amounts for the years
discounts and deducted from ended June 30 :
gross charges. Under this 2020-$139 and
prospective reimbursement 2019-$(15).
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, which were more
prevalent in periods before
2000, 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 2020 were
time of service are changed by 1%, our 2020 after-tax
adjusted to actual income from continuing operations
contractual allowances as would change by approximately $67 .
cash is received and claims This is only one example of
are reconciled. We evaluate reasonably possible sensitivity
the following criteria in scenarios. The process of
developing the estimated determining the allowance requires
contractual allowance us to estimate the amount expected
percentages: historical to be received and requires a high
contractual allowance degree of judgment. It is impacted
trends based on actual bychanges in managed care contracts
claims paid by managed care and other related factors.
payors; review of A significant increase in our
contractual allowance estimate of contractual discounts
information reflecting wouldlower our earnings. This would
current contract terms; adversely affect our results of
consideration and analysis operations, financial condition,
of changes in payor mix liquidity and future access to
reimbursement levels; and capital.
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.
2020 2019
Pharmacy
Trade name $ 1,180 $ 1,180
Customer relationships 1,089 1,089
Medicare License 623 623
2,892 2,892
Accumulated amortization (1,638) (1,539)
Total $ 1,254 $ 1,353
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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 The reserve for professional and circumstances. Changes in
each contract year commencing general liability claims assumptions used by our independent
March 1, 2011 through February 29, reflects the current estimate of actuary with respect to demographics
2016 and was reduced to $750 from all outstanding losses, and geography, Industry trends,
March 1, 2016 to now. including incurred but not development patterns and judgmental
reported losses, based upon selection of other factors may
Each year, we obtain quotes from actuarial calculations as of the impact our recorded reserve levels
various malpractice insurers with balance sheet date. The loss and our results of operations.
respect to the cost of obtaining estimates included in the Changes in our initial estimates of
medical malpractice insurance actuarial professional and general liability
coverage. We compare these quotes to calculations may change in the claims are non-cash charges and
our most recent actuarially future based upon updated facts accordingly, there would be no
determined estimates of losses at and circumstances. material impact currently on our
various self-insured retention liquidity or capital resources. levels. Accordingly, changes in We revise our reserve estimation insurance costs affect the
process by obtaining independent
self-insurance retention level we actuarial calculations
choose each year. As insurance costs quarterly.
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
2020-$123 and significantly affected
2019-$920 if current and future
The total increases (decreases) claims differ from
for professional and general historical trends. While
liability coverage, included in we monitor reported
our consolidated results of claims closely and
operations for the years ended consider potential
June 30, was as follows: outcomes as estimated by
2020-$(338); and our independent
2019-$351. 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, 2020, excluding the impact of
in a tax deduction in future years deferred tax asset valuation allowances. At June 30, 2020,
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 $8,389
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, 2020. 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 balance (net of valuation evidence that was objective in nature
allowance) in our consolidated The second step is to as compared to subjective evidence.
balance sheets as of June 30 for determine the amount of Also, more significant weight was given
the following years was as the valuation to evidence we judged directly related
follows: allowance. We will to our current financial performance as
2020-$0; and generally establish a compared to less current evidence and
2019-$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 2020,
2020-$8,389; and the jurisdiction we would incur approximately $0 of
2019-$8,625. identified in the first additional tax expense for 2020 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.
2020 2019
Net Revenues-Healthcare Services $ 16,243 $ 15,453
Net Revenues-Pharmacy 31,570 30,165
Total Net Revenues 47,813 45,618
Costs and expenses (48,142 ) (48,000 )
Electronic health records incentives 0 68
Operating Loss (329 ) (2,314 )
Federal stimulus - Pandemic relief funds 54 0
Gain on economics damages claim-net 0 22
Interest Expense (29 ) (241 )
Loss on extinguishment of debt-net (178 ) 0
Gain on sale of assets 192 455
Loss from continuing operations before income taxes
Healthcare Services segment:
Hospital and Nursing Home Admissions 400 487
Hospital and Nursing Home Patient Days 26,154 26,780 Results of Operations Our net revenues are from our two business segments, Healthcare Services and Pharmacy. The Company's net revenues by payor were as follows for the years endedJune 30, 2020 and 2019: 2020 2019 Medicare$ 20,013 $ 18,183 Medicaid 13,956 13,871 Retail and Institutional Pharmacy 6,465 6,649 Managed Care & Other Insurance 6,742 6,220 Self-pay 498 505 Rent 16 63 Other 123 127 Total Net Revenues$ 47,813 $ 45,618 Healthcare Services net revenues in the current year are composed of revenues from one hospital, one nursing home, and a subsidiary which provides information technology services to outside customers and SunLink subsidiaries. Healthcare Services net revenues increased$790 or 5.1% in the year endedJune 30, 2020 compared to the year endedJune 30, 2019 . The increase in net revenues for fiscal 2020 resulted from increased net revenues in all three businesses. Hospital net revenue's increased 4.4% in the fiscal year endedJune 30, 2020 compared to the prior year with the hospital geriatric psychiatry unit patient days increasing 16.7% from year to year. Nursing home net revenues increased 6% and IT services net revenues increased 21% in the fiscal year endedJune 30, 2020 . Net revenues from continuing operations increased$139 for the year endedJune 30, 2020 and decreased$15 for the year endedJune 30, 2019 from the settlement of prior year Medicare and Medicaid cost reports. Pharmacy Segment net revenues for the year endedJune 30, 2020 of$31,570 increased 4.7% from the prior year due to increased net revenues fromRetail Pharmacy ,Institutional Pharmacy and DME. Revenues from DME increased 9.0% due to a 9.9% increase in sales revenue per DME sales orders.The Retail Pharmacy net revenues increased 3.9% this fiscal year due to a 3.9% increase in sales revenue per script sold.The Institutional Pharmacy net revenues increased 2.0% due to a 4.8% increase in the number of prescriptions filled. 43 -------------------------------------------------------------------------------- Costs and expenses, including depreciation and amortization, were$48,142 and$48,000 for the fiscal years endedJune 30, 2020 and 2019, respectively. Costs and expenses as a percentage of net revenues were: 2020 2019 Cost of goods sold 39.8 % 41.5 % Salaries, wages and benefits 40.7 % 42.1 % Supplies 2.5 % 2.7 % Purchased services 6.2 % 5.5 % Other operating expenses 7.3 % 8.5 % Rent and lease expense 1.3 % 1.3 % Depreciation and amortization expense 3.0 % 3.3 % Cost of goods sold as a percent of net revenues decreased 1.7% in the fiscal year endedJune 30, 2020 compared to the prior fiscal year due to the increased sales price of Pharmacy Segment product in the current fiscal year. Salaries, wages and benefits expense as a percent of net revenues decreased 1.4% this year compared to the prior fiscal year due to the increased net revenues this year. Purchased services expenses as a percent of net revenues increased 0.7% this year compared to the prior fiscal year due to the addition of a new contracted service line at a hospital. Other operating expenses decreased 1.2% due to decreased professional liability expenses.
Operating Profit (Loss)
Operating losses were
Other Income - Federal stimulus - Pandemic relief funds
As part of CARES, two subsidiaries received total payments of$4,586 under theProvider Relief Fund ("PRF"). These funds were allocated to Medicare facilities and providers affected by COVID-19 based on eligible provider's net patient revenues and are required to be used for COVID-19 related costs and to offset the effect of COVID-19, including reduced revenues. The relief funds are recognized as government grants. The Company recognized income when it was able to comply with the relevant conditions of the grant. During the fiscal year endedJune 30, 2020 ,$54 of these funds were recognized as Other Income for reimbursement of "Lost Revenues and for COVID-19 related expenses.
Interest Expense-net
Interest expense, net was$29 and$241 for the years endedJune 30, 2020 and 2019, respectively. The decrease in interest expense for the year endedJune 30, 2020 was due to lower outstanding debt which resulted from the repayment of the Trace RDA loan during the year.
Loss on extinguishment of debt
During the year endedJune 30, 2020 , the Company repaid the outstanding balance of the Trace RDA Loan, which was scheduled to be fully repaid inJuly 2027 . The pre-payment was made with cash on hand. The Company recorded a non-cash loss on early extinguishment of debt relating to the pre-payment of$178 during the year endedJune 30, 2020 . Gain on Sale of Assets OnDecember 20, 2019 , the Company sold a medical office building and approximately 4 acres of land inClanton, AL . After expenses, the Company received net proceeds from the sale of$204 , which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was$86 and is included in the Company's results for the fiscal year endedJune 30, 2020 . OnSeptember 9, 2019 , the Company sold approximately 11.4 acres of undeveloped land inFulton, MO. After expenses, the Company received net proceeds from the sale of$348 , which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was$100 and is included in the Company's results for the fiscal year endedJune 30, 2020 . 44 -------------------------------------------------------------------------------- OnOctober 11, 2018 , the Company sold a vacant medical office building and approximately 2 adjacent acres of undeveloped land inDahlonega, GA. After expenses, the Company received net proceeds from the sale of$935 , which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property of$452 is included in the Company's results for the fiscal year endedJune 30, 2019 . Income Taxes We recorded income tax expense of$296 ($296 state tax expense) for the year endedJune 30, 2020 compared to an income tax benefit of$82 ($113 federal tax benefit and$31 state tax expense) for the year endedJune 30, 2019 . Key income tax provisions of the CARES Act include new health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. The corporate income tax provisions of the CARES Act include allowing the carryback of net operating losses ("NOL") generated in recent tax years, temporary removal of the 80% NOL usage limitation put in place under the Tax Cuts and Jobs Act ("TCJA") enacted onDecember 27, 2017 , temporary favorable adjustments to the business interest expense limitation calculated under Sec. 163(j), and the acceleration of refundable Alternative Minimum Tax ("AMT") credits. Of the CARES Act provisions, the most material income tax considerations to the Company are related to the amounts received as general and targeted PRF and the amounts received under the PPP loans. Based on the latest publishedIRS guidance as of preparation of theJune 30, 2020 financial statements, the PRF is be fully includable in taxable income and any amounts of income or expense related to the PPP loans will be excluded for tax purposes. The result of including the PRF in taxable income and disallowing PPP loan expenses for the period is a total addition to taxable income of$7,303 . The Company has sufficient federal and state net operating losses for the period to cover the resulting provisionalJune 30, 2020 taxable income, except inMississippi , the source of the substantial majority of the Company's PRF. TheJune 30, 2020 current tax expense, as booked representsMississippi state income tax. The Company will continue to monitor the latest availableIRS guidance on these funds for treatment on theJune 30, 2020 tax return filing, which is dueApril 15, 2021 . The Company elected to treat remaining available AMT credits as fully refundable as of the 2018 tax year as allowed by the CARES Act. As ofJune 30, 2020 the Company has made use of this election in order to claim and received all remaining refundable AMT credits in the amout of$305 . We believe that the remainder of the corporate income tax provisions of the CARES Act should not have a material impact on the Company afterJune 30, 2020 . Due to the Company's history of losses , there is no potential for the carryback of NOLs. The temporary removal of the 80% income limitation on NOL usage has no impact as the Company has substantial NOLs generated in years prior to the enactment of the TCJA not subject to this 80% limitation. The Company also does not have any interest expense disallowed under Sec. 163(j) after consideration of the PRF and PPP loan adjustments discussed previously that would be impacted by the CARES Act. In accordance with the FASB 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. AtJune 30, 2020 , consistent with the above process, we evaluated the need for a valuation against our deferred tax assets and determined that it was more likely than not that none of our deferred tax assets would be realized. As a result, in accordance with ASC 740, we recognized a valuation allowance of$8,389 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability atJune 30, 2020 . We conducted our evaluation by considering available positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. Also, more significant weight was given to evidence that directly related to our current financial performance as compared to less current evidence and future plans. The principal negative evidence that led us to determine atJune 30, 2020 that all the deferred tax assets should have full valuation allowances was the three-year cumulative pre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Services Segment businesses operate. 45 -------------------------------------------------------------------------------- For Federal income tax purposes, atJune 30, 2020 , the Company had approximately$17,500 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 TCJA onDecember 22, 2017 , federal net operating loss carryforwards generated in taxable years beginning afterDecember 31, 2017 now have no expiration date. The Company's returns for the periods prior to the fiscal year endedJune 30, 2017 are no longer subject to potential federal and state income tax examination.
Discontinued Operations
Loss from discontinued operations net of income tax was$554 for the year endedJune 30, 2020 , and earnings from discontinued operations net of income taxes were$242 for the year endedJune 30, 2019 . The results of all the businesses in .discontinued operations are presented below:Parkside Nursing Home - OnMarch 17, 2019 , a subsidiary of the Company sold itsParkside Ellijay Nursing Home ("Parkside") and related real estate for$7,300 . The pre-tax gain on the sale was$2,136 in the fiscal year. The net proceeds of the sale were retained for working capital and general corporate purposes. Sold Hospitals - Subsidiaries of the Company have sold substantially all of the assets of four hospitals ("Other Sold Hospitals") during the periodJuly 2, 2012 toAugust 19, 2016 . The income (loss) before income taxes of the Other Sold Hospitals results primarily from the effects of prior year Medicare and Medicaid cost report settlements and retained professional liability claims expenses. 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. EffectiveFebruary 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 endedJune 30, 2020 and 2019.
Discontinued Operations-Summary Statement of Earnings Information
2020 2019
Net Revenues:
Parkside $ 11 $ 5,574
Sold Hospitals 26 (581 )
$ 37 $ 4,993
Loss Before Income Taxes:
Parkside $ (246 ) $ (756 )
Sold Hospitals (172 ) (919 )
Life sciences and engineering (136 ) (137 )
Loss before income taxes (554 ) (1,812 )
Gain (Loss) on Sale:
Parkside 0 2,136
Sold Hospitals 0 0
Gain (Loss) on Sale 0 2,136
Income tax expense 0 82
Earnings (Loss) from discontinued operations, net of
income taxes $ (554 ) $ 242
Net Loss - Net loss for the year ended June 30, 2020 was $1,140 (a loss of $0.16
per fully diluted share) compared to the net loss for the year ended June 30,
2019 of $1,754 (a loss of $0.25 per fully diluted share).
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Liquidity and Capital Resources
Overview
Our primary source of liquidity is unrestricted cash on hand, which was$11,184 atJune 30, 2020 . Currently, the Company's ability to raise capital (debt or equity) in the public or private markets on what it considers acceptable terms is highly uncertain, and due to the COVID-19 pandemic, may be non-existent. The Company and five subsidiaries received approximately$3,234 of loans under the Paycheck Protection Program and approximately$4,586 of payments under theProvider Relief Fund plan. These funds are required to be expended under the terms of the government programs which authorized them. The Company is uncertain as to whether these funds will be sufficient to sustain its operations for the duration of the COVID-19 pandemic which is itself uncertain. From time-to-time, nevertheless, we may seek options to obtain financing for the liquidity needs of the Company or individual subsidiaries based on anticipated needs. The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand. Subject to the effects, risks and uncertainties associated with the COVID-19 pandemic and government programs discussed herein, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months. CARES Act Paycheck Protection Plan Loans- The CARES Act was enacted by theU.S. government onMarch 27, 2020 . As part of the CARES Act, the PPP loan program was established and is administered by the SBA. In April andMay 2020 , subsidiaries of the Company received approximately$3,234 of PPP loans through the Company's regular bank. Forgiveness of PPP loans may be available if the loan proceeds are used to pay wages, rent, utilities and interest on certain debt during the eight-week period following receipt of such proceeds and based on other Federally-established terms and conditions. DuringJuly 2020 , the allowable period for the use of loan proceeds was amended to up to a 24-week period. The borrowing subsidiaries must apply for loan forgiveness with the lending bank within ten months after the allowable use period. The forgiveness applications will be reviewed by both the bank and the SBA and a loan forgiveness amount, if any, will be determined. There can be no assurance, however, that any of our PPP loans will be forgiven, or if forgiven, the amount of such forgiveness. Loan proceeds not forgiven are payable over two years at a 1% annual interest rate. Prior to aJuly 2020 amendment, the two-year loan repayment was to begin six months after the loan was funded.Trace RDA Loan- Southern Health Corporation of Houston, Inc. ("Trace"), a wholly owned subsidiary of the Company, closed on a$9,975 Mortgage Loan Agreement ("Trace RDA Loan") with a bank, dated as ofJuly 5, 2012 . During the year endedJune 30, 2020 , the Company repaid the entire outstanding balance of the Trace RDA Loan, which was scheduled to be repaid inJuly 2027 . The pre-payment was made with cash on hand. The Company recorded a non-cash loss on early extinguishment of debt relating to the pre-payment of$178 during the year endedJune 30, 2020 . The Trace RDA Loan had a term of 15 years with level monthly payments of principal and interest. The Trace RDA Loan interest rate was the prime rate (as published in theWall Street Journal ) plus 1% with a floor of 5.5%. The Trace RDA Loan was collateralized by real estate and equipment of Trace. The Trace RDA Loan contained various covenants, terms and conditions, including financial restrictions and limitations, and affirmative and negative covenants and was guaranteed by SunLink. AtJune 30, 2019 , Trace was not in compliance with the debt service coverage, fixed charge coverage and funded debt to EBITDA ratios and the entire outstanding amount of the Loan was classified as a current liability.
Contractual Obligations, Commitments and Contingencies
Contractual obligations related to long-term debt, non-cancelable operating leases and interest on outstanding debt from continuing operations atJune 30, 2020 is shown in the following table. The interest on variable interest debt is calculated at the interest rate in effect atJune 30, 2020 . Interest on Payments Long-Term Long-Term due in: Debt Debt 1 year$ 1,401 $ 45 2 years 1,904 33 3 years 39 2 4 years 14 0 5 years 0 0 More than 5 years 0 0$ 3,358 $ 80 47
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Long-term Debt -At
Recent Accounting Pronouncements
InJanuary 2017 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Instead of a two-step impairment model, if the carrying amount of a reporting unit exceeds its fair value as determined in step one of the impairment test, an impairment loss is measured at the amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning afterDecember 15, 2019 , with early adoption permitted. The Company does not believe adoption of this pronouncement will have a material impact on its financial position 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$251 and$306 to the law firm in the fiscal years endedJune 30, 2020 and 2019, respectively. Included in the Company's consolidated balance sheets atJune 30, 2020 and 2019 is$6 and$47 of amounts payable to the law firm.
Inflation
During periods of inflation and labor shortages, employee wages increase and
suppliers pass along rising costs to us in the form of higher prices for their
supplies and services. We have not always been able to offset increases in
operating costs by increasing prices for our services and products or by
implementing cost control measures. We are 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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