SUNLINK HEALTH SYSTEMS, INC. CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share and admissions data)
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 Item 2,SunLink Health Systems, Inc. , and its consolidated subsidiaries are referred to on a collective basis as "SunLink", "we", "our", "ours", "us" or the "Company." This drafting style is not meant to indicate thatSunLink Health Systems, Inc. or any particular subsidiary ofSunLink Health Systems, Inc. owns or operates any asset, business, or property. Healthcare services, pharmacy operations and other businesses described in this filing are owned and operated by distinct and indirect subsidiaries ofSunLink Health System, Inc. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors that could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance, and achievements to differ materially from those anticipated, include, but are not limited to:
General Business Conditions
• general economic and business conditions in the
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 services, the efficiency of such services, availability of
staffing, availability of supplies, cost and financial results;
• increases in uninsured and/or underinsured patients due to 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
pharmacy businesses;
• demographic changes in areas where we operate;
• the availability of cash or borrowings to fund working capital,
renovations, replacements, expansions, and capital improvements atexisting healthcare and pharmacy facilities and for acquisitions and
replacement of such facilities;
• changes in accounting principles generally accepted in the U.S. ; and
• Fluctuations in the market value of equity securities including SunLink
common shares.
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 of reimbursement payments received under government
programs;
• changes in interest rates under any lending agreements and other
indebtedness;
• the ability or inability to refinance or pay principal on existing
indebtedness and/or any existing or potential defaults under existing
indebtedness;
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• the ability to achieve forgiveness of outstanding Paycheck Protection
Program ("PPP") loans or any similar future loans and/or the lack of
availability of future governmental support that may be required to offset
the effect of the COVID-19 pandemic;
• the ability to achieve compliance with requirements for the expenditure
and retention of PRF funds:
• restrictions imposed by existing or future lending agreements or other
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 insurers, healthcare providers, and others to contain
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 or 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;
• changes in prices of materials and services utilized in our Healthcare
Services and Pharmacy segments;
• changes in wages as a result of inflation or competition for physician,
nursing, pharmacy, management, and staff positions;
• changes in the amount and risk of collectability of 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; and
• 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 sales tax position in
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 known and unknown government
investigations;
• claims for product and environmental liabilities from continuing and
discontinued operations;
• professional, general, and other claims which may be asserted against us; and
• 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.
Regulation and Governmental Activity
• existing and proposed governmental budgetary constraints;
• Federal and state insurance exchanges and their rules relating to
reimbursement terms;
• the decision by
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;
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• 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; EHR reimbursement and indigent care
reimbursements (Medicare Upper Payment Limit "UPL" and Disproportionate
• 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, accountable care
and similar organizations, competitive bidding and other reforms).
Dispositions, Acquisition and Renovation Related Matters
• the ability to dispose of underperforming facilities and business segments;
• the availability of cash and the terms of capital to fund acquisitions,
improvements, renovations or replacement facilities; and
• competition in the market for acquisitions of hospitals, nursing homes,
pharmacy facilities, and 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 and/or in our Annual Report on Form 10-K.
Business Strategy: Operations, Dispositions and Acquisitions
The business strategy of SunLink is to focus its efforts on improving the
operations, services and profitability of its existing Healthcare Services and
Pharmacy businesses. However, we believe the COVID-19 pandemic has resulted in
substantial additional uncertainties and risks in our businesses which are not
subject to estimation at this time, particularly because they are novel in
nature, uncertain in duration, and materially affected by government actions
related to the pandemic. Although the Company intends to pursue its business
strategy of improving its operations, services and profitability of its existing
businesses, in response to the pandemic, it has discontinued certain services,
laid off or furloughed employees where necessary, reduced cash outlays where
possible, and deferred other strategic activities. Our ability to resume the
pursuit of our normal business strategy will depend on the effect of, among
other things, the nature, extent and timing of the COVID-19 pandemic and
government actions in response thereto.
In prior years, the Company has used a portion of the cash proceeds from prior
dispositions of assets to pay down debt and certain other liabilities, to
repurchase common shares, and to make improvements to its Healthcare Services
and Pharmacy businesses. The Company expects to use existing cash primarily to
sustain it operations during the COVID-19 pandemic and for other general
corporate purposes. There is no assurance that any further dispositions of
assets will be authorized by the Company's Board of Directors or, if authorized,
that any such transactions will be
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completed or, if completed, will result in net cash proceeds to the Company on a
before or after-tax basis. The Company considers the disposition of business
segments, facilities and operations based on a variety of factors in addition to
under-performance, including asset values, return on investments, competition
from existing and potential competitors, capital improvement needs, the
prevailing reimbursement environment under various Federal and state programs
(e.g., Medicare and Medicaid) and private payors, and other corporate
objectives. Although the Company believes certain portions in its Healthcare
Services segment as well as its Pharmacy segment continue to under-perform, the
Company is not currently offering any of its businesses for sale, as it believes
current economic conditions are generally unfavorable for the disposition of
such assets.
COVID-19 Pandemic
COVID-19 was declared a global pandemic by the World Health Organization on
March 11, 2020 . We have been monitoring the COVID-19 pandemic and its impact on
our operations, and we have taken significant steps intended to minimize the
risk to our employees and patients. Certain employees have been working
remotely, but we believe these remote work arrangements have not materially
affected our ability to maintain critical business operations, which are being
conducted substantially in accordance with our understanding of applicable
government health and safety protocols and guidance issued in response to the
COVID-19 pandemic, although such protocols and guidance are recent, rapidly
changing and at times, unclear. Nevertheless, as in many healthcare
environments, we have experienced COVID-19 illness, including deaths, and some
employees have tested positive and were placed on leave or in quarantine.
In late December 2020 , we began receiving allotments of COVID-19 vaccine and
have begun to vaccinate patients, providers, employees, and staff in accordance
with the protocols and guidelines in the states where we operate. Not all such
individuals have been vaccinated to date and some individuals have not consented
to vaccination.
In our Healthcare businesses, we have experienced material reductions in demand
and net revenues due to the COVID-19 outbreak. There appears to be minimal
current demand for nursing home admissions, and clinic visits and hospital
services have substantially decreased as well in part due to the abrupt
retirement of one physician in the quarter ended June 30, 2020 and reduced
capacity of other physicians and providers, all as a result of the effects of
the pandemic. The availability and cost of medical supplies have adversely
affected our Healthcare businesses, especially with respect to access to
personal protective equipment, cleaning supplies and COVID-19 testing materials.
We continue to monitor supplies and seek additional sources of many supply
items. A reduction in the availability of qualified employees has also 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.
Since the beginning of the COVID-19 pandemic, 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
substantially reduced capacity. Until these referral sources are at full
capacity, we believe the COVID-19 pandemic will continue to affect the demand
for DME products and Retail and Institutional Pharmacy drugs and products.
Reductions in employee hours have been made in response to the lower demand.
Nursing homes and other customers of such Institutional Pharmacy services are
currently being adversely affected by the spreading of the COVID-19 pandemic,
and this may be expected to have a further negative effect on such demand. Our
Institutional Pharmacy services have experienced increased costs and operational
inefficiencies due to measures taken to protect our employees and by access
controls and other restrictions implemented by our institutional customers. The
impact of the COVID-19 pandemic has negatively affected our supply processes,
especially with respect to access to respiratory equipment and certain personal
protective equipment and cleaning products. We believe the effect of the
COVID-19 pandemic and public and governmental responses to it negatively
affected our last five fiscal quarters results.
During the period April 1, 2020 through March 31, 2021 , our Healthcare and
Pharmacy segments received $5,070 in general and targeted Provider Relief Fund
("PRF") distributions. During the quarter ended June 30, 2020 , we also received
$3,234 in Paycheck Protection Programs ("PPP") loans, administered by the SBA.
Both the PRF and PPP funds are provided for under the CARES Act and we have
received a total of $8,304 of such funding.
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The distributions from the PRF are 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 received have been used for healthcare- Based upon
the current HHS guidance, we will calculate at the end of the quarter ended June
30, 2021 the change of patient revenues for the period of January 1, 2021 to
June 30, 2021 compared to the actual patient care revenue of the period January
1, 2020 to June 30, 2020 . If the period January 1, 2021 to June 30, 2021 is less
the same period for calendar 2020, the decrease is eligible to be recognized as
Lost Revenue in the quarter ended June 30, 2021 . funds under the PRF are
accounted for as government grants and are recognized on a systematic and
rational basis once there is reasonable assurance that the applicable terms and
conditions required to retain the funds have been met. HHS has released "CARES
Act Provider Relief Fund Frequently Asked Questions ("FAQ") numerous times since
April 3, 2020 through April 1, 2021 to clarify PRF requirements and has provided
expansive examples of the reporting requirements in efforts to demonstrate
amounts of the PRF received may be considered to have been earned and which may
be retained. The Company continues to review and analyze the FAQ. Of the $5,070
of PRF COVID-19 related distributions received during the period April 1, 2020
through March 31, 2021 , we are reporting $3,459 of PRF as other income in our
consolidated statement of operations for our nine months ended March 31, 2021
related to COVID-19 related expenses and Lost Revenues. The uses of PRF
consisted of COVID-19 personal protective equipment, allowable capital
expenditures and salary expenses for allowable patient care activities. The lost
revenues were calculated as the reduction of patient care revenues in calendar
2020 compared to the calendar 2020 budget and actual patient care revenues of
calendar 2019 in accordance with the latest guidance from HHS. Based upon the
current HHS guidance, at the end of the quarter ended June 30, 2021 , we will
calculate the change of patient revenues for the period of January 1, 2021 to
June 30, 2021 compared to the actual patient care revenue of the period January
1, 2020 to June 30, 2020 . If the period January 1, 2021 to June 30, 2021 is less
than the same period for calendar 2020, the decrease is eligible to be
recognized as Lost Revenue in the quarter ended June 30, 2021 . The unrecognized
amount of the PRF related are recorded under the caption "Unearned CARES Act
Funds" in our consolidated balance sheets. We will continue to monitor
compliance with the terms and conditions of the PRF and 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 may have to return the unutilized portion of those funds, if any,
in the future.
Forgiveness of PPP loans may be available if the loans were used to pay wages,
rent, utilities and interest on certain debt during the eight-week period
following receipt of the loan proceeds, subject to Federally-established terms
and conditions. During July 2020 , the allowable period for the use of PPP loan
proceeds was amended to allow for a 24-week utilization period. The borrowing
subsidiaries must apply for loan forgiveness with the lending bank within ten
months after the end of the allowable period. The forgiveness applications are
to be reviewed by both the lender and the SBA and a loan forgiveness amount, if
any, will be determined. There can be no assurance, however, that any of the PPP
loans to us 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. The two-year loan repayment begins two months after the loan forgiveness
amount is determined by SBA. The Company has applied for forgiveness for $287 of
its $3,234 of PPP loans and recorded no income relating to the PPP loans through
March 31, 2021 .
Going forward, the Company is unable to determine the extent to which the
COVID-19 pandemic 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 effect of the COVID-19 pandemic on our balance sheet
and results of operations will depend on: the severity and length of the
pandemic; government actions to mitigate the pandemic's effect; regulatory
changes in response to the pandemic, especially those that affect our hospital,
nursing home and pharmacy operations; existing and potential government
assistance that may be provided; and the requirements of PRF receipts and PPP
loans, including our ability to retain such PRF received and obtain forgiveness
of the PPP Loans.
For additional discussion of the risks presented by the COVID-19 pandemic to our results, see Risk Factors in Part II, Item 1A of this Form 10-Q.
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Critical Accounting Estimates
The preparation of financial statements in accordance withU.S. GAAP 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 results of operations or financial condition. Our critical accounting estimates are more fully described in our 2020 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.
Financial Summary
The Company's operations for the three and nine months ended
The results of continuing operations shown in the financial summary below are for our two business segments, Healthcare Services and Pharmacy.
Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 % Change 2021 2020 % Change
Net Revenues - Healthcare
Services $ 3,286 $ 4,034 (18.5 )% $ 10,119 $ 12,580 (19.6 )%
Net Revenues - Pharmacy 6,492 8,633 (24.8 )% 20,231 24,544 (17.6 )%
Total Net Revenues 9,778 12,667 (22.8 )% 30,350 37,124 (18.2 )%
Costs and expenses (10,318 ) (12,705 ) (18.8 )% (31,467 ) (37,101 ) (15.2 )%
Operating profit (loss) (540 ) (38 ) 1321.1 % (1,117 ) 23 (4956.5 )%
Interest income (expense) - net (7 ) 10 (170.0 )% (21 ) (24 ) (12.5 )%
Federal stimulus - Provider
relief funds 11 0 NA 3,459 0 NA
Loss on extinguishment of debt 0 (18 ) NA 0 (178 ) NA
Gain on sale of assets 1 0 NA 14 193 (92.7 )%
Earnings from continuing
operations before income taxes $ (535 ) $ (46 ) 1063.0 % $ 2,335 $ 14 16578.6 %
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 and nine
months ended March 31, 2021 and 2020:
Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
Medicare $ 4,220 $ 4,669 13,468 15,028
Medicaid 2,658 4,075 7,879 11,319
Managed Care & Other Insurance 1,203 1,939 3,924 5,335
Self-pay 120 95 341 333
Other 84 63 160 142
Total Net Revenues $ 9,778 $ 12,667 $ 30,350 $ 37,124
The Healthcare Services segment in the current year is composed of one hospital,
one nursing home and a subsidiary which provides information technology services
to outside customers and SunLink subsidiaries. Healthcare Services net revenues
decreased $748 , or 19%, for the three months period ended March 31,2021 compared
to net revenues for the comparable prior year period. The decrease in net
revenues for the third fiscal quarter this year resulted
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primarily from the reduced patient demand as a result of the COVID-19 pandemic.
Hospital patient days decreased 15% , nursing home patient days decreased 33%
and clinic visits decreased 36% for the three months ended March 31, 2021 from
the same period last year.
Healthcare Services net revenues decreased $2,461 , or 20%, for the nine months
period ended March 31,2021 compared to net revenues for the comparable prior
year period. The decrease in net revenues for the three months this year
resulted primarily from the reduced patient demand as a result of the COVID-19
pandemic. Hospital patient days decreased 31% , nursing home patient days
decreased 28% and clinic visits decreased 37% for the nine months ended March
31, 2021 from the same period last year. The settlement of prior year Medicare
and Medicaid cost reports increased net revenues from continuing operations by
$69 for the nine months ended March 31, 2021 and increased net revenues from
continuing operations by $107 for the nine months ended March 31, 2020 .
Pharmacy segment net revenues for the three months period ended March 31, 2021
decreased $2,141 , or 25% from the three months period ended March 31, 2020 and
for the nine months period ended March 31, 2021 decreased $4,313 , or 18% from
the nine months period ended March 31, 2020 . Pharmacy scripts filled decreased
16% for the quarter ended March 31, 2021 and 11% for nine months ended March 31,
2021 from the prior year periods. Durable Medical Equipment sales orders
decreased 9% for the three month period ended March 31, 2021 and 17% for the
nine months ended March 31, 2021 from prior year periods. The decreased net
revenues resulted from decreased referrals from physician offices and other
sources due to the COVID-19 pandemic and the related downward turn in the local
economies serviced by the segment. Also, the operations of the Pharmacy segment
in Lake Charles, Louisiana were impacted by Hurricane Laura in August 2020 and
by Hurricane Delta in October 2020 . The local area suffered devasting winds and
flooding and customer demand decreased as a result.
Costs and expenses, including depreciation and amortization, were $10,318 and
$12,705 for the three months ended March 31, 2021 and 2020, respectively. Costs
and expenses, including depreciation and amortization, were $31,467 and $37,101
for the nine months ended March 31, 2021 and 2020, respectively.
Cost and Expenses
as a % of Net Revenues
Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
Cost of goods sold 37.7 % 42.4 % 38.5 % 39.9 %
Salaries, wages and benefits 43.0 % 38.6 % 42.2 % 39.5 %
Supplies 2.4 % 2.5 % 2.4 % 2.6 %
Purchased services 5.7 % 6.3 % 6.1 % 6.1 %
Other operating expenses 11.9 % 6.4 % 10.0 % 7.8 %
Rent and lease expense 1.4 % 1.2 % 1.4 % 1.2 %Depreciation and amortization expense 3.5 % 2.9 % 3.2 % 2.8 %
Cost of goods sold decreased as a percent of net revenues for the three and nine months period endedMarch 31, 2021 due to decreased sales of intravenous drugs this year which have a higher cost than other Pharmacy segment products. Salaries, wages, and benefits, purchased services, and depreciation and amortization expense increased as a percent of net revenues for the three and nine months period endedMarch 31, 2021 compared to same period last fiscal year due to the lower net revenues this year resulting from the COVID-19 pandemic. These expenses actually decreased in dollar amounts his fiscal year. Other operating expenses increased in dollar amounts and a percent of net revenues during the fiscal year endedMarch 31, 2021 compared to the prior year due to increased cost of insurance and related expense for estimated insured loss retention. Operating Profit (Loss) The Company reported an operating loss of$540 for the three months period endedMarch 31, 2021 compared to an operating loss of$38 for the three month period endedMarch 31, 2020 . The Company reported an operating loss (exclusive of the effect of PRF distributions) of$1,117 for the nine month period endedMarch 31, 2021 compared to operating profit of$23 for the nine month period endedMarch 31, 2020 . Such operating losses for the three and nine month periods endedMarch 31, 2021 were primarily a result of the decreases in net revenues this year and higher costs as a percentage of net revenues resulting from the COVID-19 pandemic. 23
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Other Income - Federal Stimulus - Provider relief funds
As part of the CARES ACT, two subsidiaries have received PRF payments. The
Company recognized
Asset Sales
OnSeptember 9, 2019 , the Company sold approximately 11.4 acres of undeveloped land. After expenses, the Company received net proceeds from the sale of$348 . The pre-tax gain on the sale of property was$100 and is included in the Company's results for the nine months period endedMarch 31, 2021 .
Interest Income (Expense) -Net
Interest expense, net, was$7 for the three months period endedMarch 31, 2021 compared to interest income, net, of$10 for the three months period endedMarch 31, 2020 , respectively. Interest expense, net, was$21 for the nine months period endedMarch 31, 2021 compared to interest expense, net, of$24 for the nine months period endedMarch 31, 2020 , respectively. Repayment of$3,033 of Trace's Term Loan inJune 2020 has resulted in the decreased net interest expense. The PPP Loans currently outstanding have a 1% interest rate while the Trace Term Loan had an interest rate of approximately 6%.
Income Taxes
Income tax benefit of
Of the CARES Act provisions, the most material income tax considerations related to the Company are related to the amounts received as general and targeted PRF and amounts received under the PPP loans. Based on the latest publishedIRS guidance as of the preparation of theMarch 31, 2021 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. Due to the enactment of the Consolidated Appropriations Act, 2021 onDecember 27, 2020 ,Congress specifically allows the deduction of any expenses associated with forgiven PPP loan proceeds. It is the Company's assumption atMarch 31, 2021 that all PPP Loan associated expenses will be tax deductible. The Company has sufficient federal and state net operating losses for the period to cover the resulting provisionalMarch 31, 2021 taxable income. The three and nine months endedMarch 31, 2021 current tax benefit, as booked, represents the reversal of state income taxes accrued for expenses related to PPP loan forgiveness that are being treated as tax deductible that were previously considered not tax deductible until the enactment of the Consolidated Appropriations Act, 2021 onDecember 27, 2020 . Because Retainable PRF is includable in the tax year received, the Company included$4,586 of Retainable PRF in taxable income for its tax year endedJune 30, 2020 and is including$485 of the Retainable PRF received during the nine months endedMarch 31, 2021 , in taxable income relating to its tax year endedJune 30, 2021 . The Company is projecting a taxable loss for the period endedJune 30, 2021 notwithstanding the inclusion of the$485 of Retainable PRF income. 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. 24 -------------------------------------------------------------------------------- AtMarch 31, 2021 , 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$8,445 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability atMarch 31, 2021 . 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. The principal negative evidence that led us to determine atMarch 31, 2021 that all the deferred tax assets should have full valuation allowances was the projected current fiscal year tax loss 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$19,017 . The net operating loss carry-forward which includes the$5,070 of Retainable PRF received throughMarch 31, 2021 . For Federal income tax purposes, atMarch 31, 2021 , the Company had approximately$19,017 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 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.
Earnings (Loss) from Continuing Operations after Income Taxes
Loss from continuing operations after income tax was$473 for the three months endedMarch 31, 2021 as compared to a loss from continuing operations after income tax of$46 for the three months endedMarch 31, 2020 . Earnings from continuing operations after income tax was$2,382 for the nine months endedMarch 31, 2021 as compared to earnings from continuing operations after income tax of$14 for the nine months endedMarch 31, 2020 . The increased earnings from continuing operations increased in the nine months this year compared to the prior year was due to the federal stimulus provider relief funds recognized this year.
Loss from Discontinued Operations after Income Taxes
The loss from discontinued operations after income taxes was$58 for the three months period endedMarch 31, 2021 compared to a loss from discontinued operations after income taxes of$112 for the three months period endedMarch 31, 2020 . The loss from discontinued operations after income taxes was$179 for the nine months period endedMarch 31, 2021 compared to a loss from discontinued operations after income taxes of$475 for the nine months period endedMarch 31, 2020 . The losses in the three and nine months endedMarch 31, 2021 and 2021 resulted primarily from the professional liability expenses of disposed businesses and legal fees. Net Earnings (Loss) Net loss for the three months period endedMarch 31, 2021 was$531 ($0.08 per fully diluted share) as compared to a net loss of$158 ($0.02 per fully diluted share) for the three months period endedMarch 31, 2020 . Net earnings for the nine months period endedMarch 31, 2021 was$2,203 ($0.32 per fully diluted share) as compared to a net loss of$461 ($0.07 per fully diluted share) for the nine months period endedMarch 31, 2020 . 25 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
Our primary source of liquidity is unrestricted cash on hand, which was$11,098 atMarch 31, 2021 . 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 need. However, 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 and related factors, may be non-existent. The Company and its five subsidiaries received approximately$3,234 of PPP loans and approximately$5,070 of payments of PRF. The PPP loan proceeds and PRF are required to be expended under the terms of the government programs which authorized them. The Company is uncertain as to whether the results from operations, PPP loans and PRF will be sufficient to sustain its operations for the duration of the COVID-19 pandemic which is itself uncertain. CARES Act Provider Relief Funds and Paycheck Protection Plan Loans- 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 theProvider Relief Fund ("PRF") and forgivable loans under the Paycheck Protection Program ("PPP"). We have received a total of$8,304 under the CARES Act programs consisting of$5,070 in general and targeted PRF and$3,234 of PPP loans. There can be no assurance that we will be entitled to retain all the PRF we received or that we will be entitled to have all PPP loans forgiven. 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.
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 $ 1,272 $ 468 $ 63
2 years 2,034 267 13
3 years 26 250 1
4 years 0 243 0
5 years 0 189 0
Over 5 years 0 13 0
$ 3,332 $ 1,430 $ 77
As of
As of
InMarch 2021 , the Company announced that its wholly-owned subsidiary,Trace Regional Hospital , implemented its Trace Forward Capital Plan ("Plan") totaling$2,000 to expand upgrade and improve its physical plant, patient care ancillary services and support areas. The Plan is being funded from Trace's cash on hand, a portion of which was funded by various provisions of the CARES Act. As ofMarch 31, 2021 , approximately$404 has been spent and approximately$916 has been committed to be spent on the various projects of the Plan. 26
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Discontinued Operations
Sold Hospitals andNursing Homes - Subsidiaries of the Company have sold substantially all the assets of four hospitals ("Sold Facilities") during the periodJuly 2, 2012 toMarch 17, 2019 . The loss before income taxes on the Sold Facilities results primarily from the effects of retained professional liability insurance and claims expenses and settlement of a lawsuit. 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 three and nine months endedMarch 31, 2021 and 2020, respectively.
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$85 and$33 for legal services to this law firm in the three months endedMarch 31, 2021 and 2020, respectively. The Company expensed an aggregate of$156 and$213 for legal services to this law firm in the nine months endedMarch 31, 2021 and 2020, respectively. Included in the Company's condensed consolidated balance sheets atMarch 31, 2021 andJune 30, 2020 is$81 and$6 , respectively, of amounts payable to this law firm.
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