UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2021  

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                    

Commission File No. 1-12607

 

SunLink Health Systems, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Ohio

 

31-0621189

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

900 Circle 75 Parkway, Suite 690, Atlanta, Georgia 30339

(Address of principal executive offices)

Registrant’s telephone number, including area code: (770) 933-7000

Securities Registered Pursuant to Section 12(b) of the Act:    

 

Title of each Class

Trading Symbol

Name of each Exchange on which registered

Common Shares without par value

Preferred Share Purchase Rights

SSY

-

NYSE American, LLC

-

 

Indicate by check mark whether if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

At the close of business on September 23, 2021, there were 6,924,151 shares of the registrant’s common shares without par value outstanding. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price on December 31, 2020 of the registrant’s common shares as reported by NYSE American stock exchange amounted to $6,598,017.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be filed under Regulation 14A in connection with the Annual Meeting of Shareholders of SunLink Health Systems, Inc., scheduled to be held on November 10, 2021, have been incorporated by reference into Part III of this Report. The Proxy Statement or an amendment to this Annual Report will be filed with the Securities and Exchange Commission within 120 days after June 30, 2021.

 

 


 

Certain Cautionary Statements

FORWARD-LOOKING STATEMENTS

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. Throughout the notes to the consolidated financial statements, 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 that SunLink Health Systems, Inc. or any particular subsidiary of SunLink 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 of SunLink 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 U.S., both nationwide and in the states in which we operate;

 

the effects of the coronavirus (“COVID-19”) pandemic, both nationwide and in the states in which we operate, including among other things, on demand for our customary services, the efficiency of such services, availability of staffing, availability of supplies, costs and financial results;

 

the effects of COVID-19 on our ability to provide for customary services including the number of large number of unvaccinated persons in Louisiana and Mississippi, the primary states in which we conduct healthcare operations;

 

increases in uninsured and/or underinsured patients due to COVID, unemployment or other conditions, higher deductibles and co-insurance, or other terms of health insurance and drug coverage resulting in higher bad debt amounts;

 

the competitive nature of the U.S. community hospital, extended care and rehabilitation center, nursing home, and pharmacy businesses;

 

demographic characteristics in areas where we operate, including resistance to vaccination for COVID-19 as well as demographic changes in areas where we operate;

 

the availability of cash or borrowings to fund working capital, renovations, replacements, expansions, and capital improvements at existing healthcare and pharmacy facilities and for acquisitions and replacement of such facilities;

 

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 including the impact of COVID-19 vaccination mandates on our ability to attract and retain such persons;

 

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 lack of availability of future governmental support that may be required to offset the continuing effect of the COVID-19 pandemic and absence of forgiveness features in any such future loans or an inability to meet the usage or forgiveness requirements;

 

the ability to achieve compliance with requirements 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;

 

the restrictions, clawbacks, processes, and conditions relating to our Pharmacy segment imposed by pharmacy benefit managers, drug manufacturers, and distributors; and

 

the ability of our Pharmacy segment to sustain its claims for exemption from sales taxes position in Louisiana on any revenue from sales of products and services to beneficiaries of government insurance programs to the extent reimbursed by administrators of such programs.

Liabilities, Claims, Obligations and Other Matters

 

claims under leases, guarantees, disposition agreements, and other obligations relating to asset sales or discontinued operations, including claims from sold or leased facilities and services, retained liabilities or retained subsidiaries;

 

potential adverse consequences of any known and unknown government investigations;

 

claims for product and environmental liabilities from continuing and discontinued operations;

 

professional, general, and other claims which may be asserted against us, including claims based on a future unknown to u or our physicians and other personnel to comply with COVID-19 vaccination mandates; 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 continuing decision by Mississippi (where we operate our remaining hospital and nursing home) to not expand Medicaid;

 

the regulatory environment for our businesses, including state certificate of need laws and regulations, pharmacy licensing laws and regulations, rules and judicial cases relating thereto;

 

changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for SunLink’s healthcare services including the payment arrangements and terms of managed care agreements; EHR reimbursement and indigent care reimbursements (Medicare Upper Payment Limit “UPL” and Disproportionate Share Hospital “DSH” adjustments) and governmental assessments for such programs;

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changes in or failure to comply with Federal, state or local laws and regulations and enforcement interpretations of such laws and regulations affecting our Healthcare Services and Pharmacy segments; and

 

the possible enactment of additional Federal healthcare reform laws or reform laws in states where our subsidiaries operate hospital and pharmacy facilities (including Medicaid waivers, bundled payments, managed care programs, accountable care and similar organizations, competitive bidding and other reforms).

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 Annual 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 Annual 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.

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PART I

Item 1.

Business (all dollar amounts in thousands except share, per share and revenue per equivalent admission amounts)

Overview

SunLink Health Systems, Inc., through subsidiaries, owns businesses which provide healthcare products and services in certain markets in the southeastern United States. Unless the context indicates otherwise, all references to “SunLink,” “we,” “our,” “ours,” “us” and the “Company” refer to SunLink Health Systems, Inc. and our consolidated subsidiaries. References to our specific operations refer to operations conducted through our subsidiaries and references to “we,” “our,” “ours,” and “us” in such context refer to the operations of our subsidiaries. Our business is composed of two business segments, the Healthcare Services segment and the Pharmacy segment. Our Healthcare Services segment subsidiaries own and operate an 84- bed community hospital and a 66- bed nursing home in Mississippi, and an IT service company based in Georgia. Our Pharmacy segment subsidiary owns and operates a pharmacy business in Louisiana with four service lines.

SunLink’s executive offices are located at 900 Circle 75 Parkway, Suite 690, Atlanta, Georgia 30339, and our telephone number is (770) 933-7000. Our website address is www.sunlinkhealth.com. Information contained on our website does not constitute part of this report. Certain materials we file with the SEC may also be read and copied at or through our website or at the Internet website maintained by the SEC at www.sec.gov.

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. The Company intends primarily to pursue its business strategy of improving its operations, services and profitability of its existing businesses, but subject to available capital and other resources , the Company intends to pursue growth by selective acquisitions in the healthcare and pharmacy segments. In response to the pandemic, the Company 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, including growth initiatives, 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, for growth initiatives when available and appropriate, and for other general corporate purposes. There is no assurance that any further dispositions of assets or any acquisitions will be authorized by the Company’s Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after-tax basis or on improved operations. 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.

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.

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In late December 2020, we began receiving allotments of COVID-19 vaccine and have vaccinated 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 extended care and rehabilitation center admissions and clinic visits, and hospital services have substantially decreased, 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. Extended care and rehabilitation centers 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 six fiscal quarters results but the effect of such responses was partially offset by financial assistance provided by programs enacted by the Coronavirus Aid, Relief and Economic Security (“CARES”) Act which was enacted by the U.S. government on March 27, 2020.

During the period April 1, 2020 through June 30, 2021, our Healthcare and Pharmacy segments received $5,370 in general and targeted Provider Relief Fund (“PRF”) distributions. During the quarter ended June 30, 2020, we also received $3,234 in Paycheck Protection Program (“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 $8,604 of such funding.

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 designated, allowable healthcare-related expenses and capital expenditures attributable to COVID-19 and for “Lost Revenues” as defined by HHS.  Such 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. On June 11, 2021, revised HHS guidance was released which revised reporting requirements for recipients of PRF through HHS’ PRF Reporting Portal (“PRP). PRF received from April 10, 2020 to June 30, 2020 had a deadline to use the funds of June 30, 2021 and the usage is required to be reported to the PRP by September 30, 2021. PRF received from July 1, 2020 to December 31, 2020 has a deadline to use the funds of December 31, 2021 and the usage is required to be reported to the PRP by March 31. 2022. PRF received from January 1, 2021 to June 30, 2021 has a deadline to use the funds of June 30, 2022 and the usage is required to be reported to the PRP by September 30, 2022. We intend to report to HHS by September 30, 2021 the usage of the funds consisting of amounts used for defined COVID-19 expenses and for defined Lost Revenues. Of the $5,370 of PRF received during the period April 1, 2020 through June 30, 2021, we are reporting $4,933 of PRF as other income in our consolidated statement of operations for our fiscal year ended June 30, 2021 related to COVID-19 related expenses and Lost Revenues. 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 we may have to return the unutilized portion of those funds, if any, in the future.

PPP loan forgiveness is available if the loans were used to pay wages, rent, utilities and interest on certain debt during the 24-week period following receipt of the loan proceeds, subject to Federally-established terms and conditions.  During the quarter ended June 30, 2021, $261 of our PPP loans and $3 of related accrued interest were forgiven by the SBA and as a result $264 was recorded as income relating to the PPP loan forgiveness in the quarter ended June 30, 2021. In July and August 2021, we received

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notification that the remaining outstanding $$2,972 of PPP loans and $38 of related accrued interest was forgiven by the SBA.  During the quarter ended September 30, 2021, we expect to record $3,010 of income for PPP loan forgiveness.  

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to employer retention tax credits previously made available under the CARES Act, including modifying and extending the Employee Retention Credit (“ERC”) for the six calendar months ending June 30, 2021. As a result of such legislation eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020 through June 30, 2021.  Qualified wages are limited to $10 per employee per calendar quarter in 2021. Thus, the maximum ERC available is $7 per employee per calendar quarter, for a total of $14 in 2021.  

Effective January 1, 2021, employers were eligible for ERC if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either (1) full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or (2) decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019. The Company qualified for ERC for the first and second calendar quarter of 2021 due to the decrease in gross receipts and is applying for ERC through amended our quarterly payroll tax filings for the applicable quarters.

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, extended care and rehabilitation center and pharmacy operations; existing and potential government assistance that may be provided; and the requirements of PRF receipts, including our ability to retain such PRF received.

OPERATIONS

Healthcare Services

The Healthcare Services segment is composed of:

 

A subsidiary which owns and operates Trace Regional Hospital and Trace Extended Care and Rehabilitation Center (collectively “Trace”), an 84-licensed-bed acute care hospital, located in Houston, Mississippi, which includes an 18-bed geriatric psychiatry unit (“GPU”) and a 66-bed extended care and rehabilitation center, which also is a skilled nursing facility. This facility focuses primarily on senior healthcare services.

 

A subsidiary, SunLink Health Systems Technology (‘SHS Technology”), which provides information technology services (IT) to outside customers and to SunLink subsidiaries.

 

A subsidiary which owns approximately five (5) acres of unimproved land in Houston, Mississippi.

 

A subsidiary which owns approximately twenty-five (25) acres of unimproved land in Ellijay, Georgia.

Pharmacy

The Pharmacy segment is composed of four operational areas:

 

Retail pharmacy products and services provided to residents of southwestern Louisiana;

 

Institutional pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to institutional clients or to patients in institutional settings, such as nursing homes, assisted living facilities, behavioral and specialty hospitals, hospices, and correctional facilities in Louisiana;

 

Non-institutional pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to clients or patients in non-institutional settings, including private residences in Louisana; and,

 

Durable medical equipment products and services (“DME”) consisting primarily of the sale and rental of products for institutional clients or to patients in institutional settings and patient-administered home care in Louisiana.   

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Sources of Healthcare Services Revenues

 

Trace receives payments for patient care from Federal Medicare programs, State Medicaid programs, private insurance carriers, health maintenance organizations, preferred provider organizations, TriCare, and from employers and patients directly. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a federal-state program, administered by the states, that provides hospital and extended care and rehabilitation center and nursing home benefits to qualifying individuals who are unable to afford care. Trace is certified as a healthcare services provider for persons covered by Medicare and Medicaid programs. TriCare is a federal program for the healthcare of certain U.S. military personnel and their dependents. See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Patients generally are not responsible for any difference between established charges and amounts reimbursed for such services under Medicare, Medicaid and some private insurer plans, health maintenance organization (“HMO”) plans and preferred provider organizations (“PPO”) plans, but are responsible to the extent of any exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has been increasing in recent years. Collection of amounts due from individuals typically is more difficult than from governmental or other third-party payors. Further, amounts received under the Medicare and Medicaid programs generally are significantly less than the established charges of our facilities for the services provided. Likewise, HMOs and PPOs generally seek and obtain discounts from the established charges. See “Item 1. Business—Government Reimbursement Programs—Hospitals—Medicare/Medicaid Reimbursement”.

Changes in the mix of the patient and resident population among reimbursement categories can significantly affect the profitability of our Healthcare Services operations. We cannot assure you that reimbursement payments under governmental and private third-party payor programs, including private Medicare supplemental insurance coverage, will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to these programs. Medicare reimbursement for services performed in extended care and rehabilitation center and nursing homes is subject to fixed payments under the Medicare prospective payment systems. In accordance with Medicare laws, the Centers for Medicare and Medicaid Services (‘CMS”) makes annual adjustments to Medicare payment rates in many prospective payment systems under what is commonly known as a “market basket update.” Each year, the Medicare Payment Advisory Commission (“Med PAC”), a commission chartered by Congress to advise it on Medicare payment issues, makes payment policy recommendations to Congress for a variety of Medicare payment systems. Congress is not obligated to adopt Med PAC’s recommendations, and based upon outcomes in previous years, there can be no assurance that Congress will adopt Med Pac’s recommendations in a given year. Medicaid reimbursement rates in Mississippi where a subsidiary operates an extended care and rehabilitation center also are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. However, these adjustments may not reflect the actual increase in the costs of providing healthcare services. In addition, Medicaid reimbursement can be impacted negatively by state budgetary pressures, which may lead to reduced reimbursement or delays in receiving payments. Moreover, we cannot assure you that the hospital or extended care and rehabilitation center operated by us, or the provision of goods and services offered by us, will meet the requirements for participation in such programs.

Utilization of Local Management Teams

Each of our businesses is managed by a subsidiary officer who is supported by other professional personnel as needed, including, but not limited to, a state-licensed extended care and rehabilitation center administrator, a director of nursing, nursing assistants, licensed practical nurses, staff development coordinators, activities directors, social services directors, clinical liaisons, admissions coordinators, licensed pharmacists, licensed pharmacy technicians, IT staff, and business office managers. In our businesses, more than one role may be performed by a single individual or may be delegated to more than one individual. Staff size and composition vary depending on the size and occupancy or volume of activity of each business, the types of services provided and the acuity level of the patients and residents. The extended care and rehabilitation center contracts with physicians who provide medical director services and serve on performance improvement committees. Our businesses purchase certain services including information systems from affiliates and obtain certain services, such as legal, finance, accounting, purchasing, human resources and facilities management support, from vendors recommended by SunLink.

Quality Assurance

Quality of care and services is monitored and enhanced by our clinical operations personnel, as well as family satisfaction surveys. The Improving Medicare Post-Acute Care Transformation Act of 2014 (the “IMPACT Act”), passed on October 6, 2014, requires standardized assessment data for quality improvement, payment, and discharge planning purposes across the spectrum of post-acute-care providers (“PACs”), including skilled nursing facilities.

Trace implements quality assurance procedures to monitor the level and quality of care provided to patients and has a medical director who supervises and is responsible for the quality of medical care so provided, as well as a medical advisory committee comprised of physicians who review the professional credentials of physicians applying for medical staff privileges at the facility. The medical advisory committee also reviews the quality of the logistical, medical and technological support provided to the physicians. Trace periodically conducts surveys of their patients, either during their stay or subsequently, to identify potential areas of improvement. Trace is accredited by The Joint Commission (“JCAHO”).

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Our pharmacy business maintains quality assurance procedures under the direction of licensed pharmacists-in-charge (“PIC”) including, among other procedures, regular inventories and reconciliations of drugs by a PIC, who is supported by additional staff pharmacists and additional staff pharmacy technicians.

Competition

Among the factors which we believe influence patient and customer selection in our healthcare businesses are the appearance, convenience and functionality of the facilities; the quality and demeanor of professional staff, physicians and pharmacists; and the participation of our businesses in plans which pay all or a portion of the patient’s bill. Such factors are influenced heavily by the quality and scope of services, strength of referral networks, facility location and the price of services.

Trace competes with similar senior care facilities primarily on the basis of quality of care, reputation, location, and physical appearance and, in the case of private payment residents, the charges for our services. Our Healthcare Services facilities also compete on a local and regional basis with other facilities providing similar services, including hospitals, extended care centers, assisted living facilities, home health agencies, and similar institutions. Some competitors may operate newer facilities and may provide services, including skilled nursing services that we may not offer at our extended care and rehabilitation center. Our competitors include government-owned, religious organization-owned, secular nonprofit and for-profit institutions. Many of these competitors have greater financial and other resources than we do. Although there is limited, if any, price competition with respect to Medicare and Medicaid residents (since revenues received for services provided to these residents are generally based on pre-established rates), there is substantial price competition for private payment residents. Our Trace Extended Care and Rehabilitation Center is located adjacent to our Trace Regional Hospital.

Our Pharmacy Segment competes with retail and institutional pharmacies, home health providers, and DME providers, including national chains with vastly more resources and larger distribution systems than ours, as well as with local pharmacies with strong reputations within the community.  We compete primarily on the basis of location, convenience, service, participation in pharmacy reimbursement and benefit plans, and reputation. Our retail pharmacy business seeks to provide non-pharmacy items, such as snacks and merchandise, for sale to customers who visit our pharmacy, and our local staff are generally long-time community residents known to many of our pharmacy customers.  We believe our personal service approach has provided us with the ability to compete with larger pharmacy chains which operate larger stores and provide more merchandise offerings.

SHS Technology competes with companies which provide IT hosting, computer hardware, IT software implementation, and IT consulting services to customers, either for fees or in connection with the sale of hardware or software. SHS Technology does not sell hardware or software. Some of SHS Technology’s competitors have larger staffs and greater resources and may be subsidized by hardware or software vendors or related businesses. Price competition for IT services such as SHS Technology provides is intense and some potential customers operate on legacy IT systems which make it difficult to change to systems which SHS Technology is able to support.

Managed Care

Our subsidiaries are affected by their ability to negotiate service contracts with purchasers of group healthcare services. HMOs, PPOs and pharmacy benefit managers attempt to direct and control the use of healthcare products, drugs and services through managed care programs. In addition, employers and traditional health insurers increasingly are seeking to contain costs through negotiations with facilities for managed care programs and discounts from established charges. Generally, facilities compete for service contracts with healthcare service purchasers on the basis of market reputation, geographic location, quality and range of services, quality of medical staff, convenience and price.

The importance of obtaining contracts with managed care organizations varies from market to market, depending on the market strength of such organizations. Nevertheless, a significant portion of patients in our hospital and pharmacy communities are covered by managed care or other reimbursement programs, all of which generally pay less than established charges for products and services.

The healthcare industry as a whole faces the challenge of continuing to provide quality patient care while managing rising costs, facing strong competition for patients, and adjusting to a continued general reduction of reimbursement rates by both private and government payors. Both private and government payors continually seek to reduce the nature and scope of services which may be reimbursed and healthcare reforms at both the federal and state level generally have created pressure to reduce reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations, and competitive contracting for drugs and provider services by private and government payors, have required and in the future may further require changes in our facilities, equipment, personnel, rates and/or services.

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Efforts to Control Healthcare Costs

Rural facilities, including Trace, continue to have significant unused capacity. Average occupancy rates continue to be affected negatively by payor-required pre-admission authorization, utilization review, and payment mechanisms designed to maximize outpatient and alternative healthcare delivery services for less acutely ill patients and to limit the cost of extended care and rehabilitation center and nursing home care. Admissions constraints, payor pressures, and increased competition are likely to continue. Historically, facilities owned and operated by SunLink’s subsidiaries have responded to such trends by upgrading facilities and equipment and adding or expanding certain inpatient and ancillary services. In addition, our facilities have reduced services and taken beds out of service in response to such trends. Currently we expect our facilities will continue to respond to such trends in a similar manner, subject to the availability of capital resources and our evaluation of the continued utility of such historical responses.

Health Care Reform

The Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act” or “ACA”) were signed into law by former President Obama on March 23, 2010, and March 30, 2010, respectively. The ACA alters the United States health care system and is intended to decrease the number of uninsured Americans and reduce overall health care costs. The ACA attempts to achieve these goals by expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments including disproportionate share payments, expanding the Medicare program’s use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, and bundling payments to hospitals and other providers. The ACA also contains a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program and generally prohibiting physician-owned hospitals from adding new physician owners or increasing the number of beds and operating rooms for which they are licensed. We believe the implementation or interpretation of rules and regulations, or the provisions of the ACA may have had and may continue to have an adverse effect on our financial condition and results of our operations, especially since the one state in which we operate our hospital has decided not to set up any state exchanges and not to expand Medicaid. During the prior administration, various bills were proposed or introduced into Congress to repeal and/or replace the ACA, and various executive orders and interpretations have been issued since its enactment which modified the ACA. No such bills to repeal the ACA have been enacted to date. However, among other things, as a result of 2018’s Tax Cuts and Jobs Act, the former “individual mandate” (i.e. the requirement under the ACA that persons either lacking health insurance or Medicaid or Medicare coverage face a penalty on their taxes) has been effectively eliminated. In addition, the previous administration also issued various orders and interpretations which modified application of the ACA including those that (i) permit states with federal approval to require Medicaid beneficiaries to prove with documentation that they either work or go to school and (ii) extended the term of permitted short-term plans that did not provide certain "essential benefits" specified by the ACA from a maximum duration of three months to 364 days and permitted renewal of such policies for up to three years.

 

GOVERNMENT REIMBURSEMENT PROGRAMS

Government Reimbursement Programs—Hospitals

 

A significant portion of SunLink’s Healthcare Services net revenues is dependent upon reimbursement from Medicare and Medicaid. CMS is the federal agency which administers Medicare, Medicaid and the Children’s Health Insurance Program (“CHIP”). The federal government generally reviews payment rates under its various programs annually, and changes in reimbursement rates under such programs, including Medicare and Medicaid, generally occur based on the fiscal year of the federal government which currently begins on October 1 and ends on September 30 of each year.

Medicare Inpatient Reimbursement

The Medicare program currently pays hospitals under the provisions of a prospective payment system for most inpatient services. Under the inpatient prospective payment system, a hospital receives a fixed amount for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, known as diagnosis related groups (“DRGs”). Each patient admitted for care is assigned to a DRG based upon a primary admitting diagnosis. Every DRG is assigned a payment rate by the government based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. DRG payments do not consider a specific hospital’s costs, but are national rates adjusted for area wage differentials and case-mix indices.

 

DRG rates are usually adjusted by an update factor each federal fiscal year (“FFY”). The percentage increases to DRG payment rates for the last several years have been lower than the percentage increases in the related cost of goods and services provided by general hospitals. The index used to adjust the DRG payment rates is based on a price statistic, known as the CMS Market Basket Index, reduced by congressionally mandated reduction factors and other factors imposed by CMS.

 

DRG rate increases were 2.9% and 3.1% for FFY 2021 and 2020, respectively. The 2022 FFY DRG rate increase has been set at 2.5%, which included the market basket updates of 2.4% and 2.7% for: FFY 2021 and FFY 2020. For 2022, the update factor is 2.7%. The Balanced Budget Act of 1997 originally set the increase in DRG payment rates for future FFYs at rates that would be based

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on the market basket index, which in certain years have been, and in the future may be, subject to reduction factors. If the update factor does not adequately reflect increases in the cost of providing inpatient services by our subsidiary’s hospital, our financial condition or results of operations could be negatively affected.

 

The ACA combined with the America Taxpayer Relief Act of 2012 (“ATRA”) and the Medicare Access and CHIP Reauthorization Act of 2015 (“MARA”) made a number of changes to the provisions of Medicare which include but are not limited to:

 

Reduction of Medicare payments that would otherwise be made to hospitals by specified percentages to account for preventable hospital readmissions, as defined by CMS.

 

Extension of the Medicare Dependent Hospital Program until September 30, 2022.

 

Expansion, on a temporary basis, of the low volume hospital inpatient payment adjustment to include hospitals that are more than 15 miles from other Healthcare Services and have less than 1,600 discharges per year. The new temporary criteria are effective through September 30, 2022.

 

Hospitals that do not successfully participate in the Hospital IQR Program and do not submit the required quality data will be subject to a one-fourth reduction of the market basket update.

 

A requirement that the market basket for any hospital which is not a meaningful electronic health records user will be reduced by 90% in FFY of the market basket in 2020 and 100% of the market basket for FFY 2021 and thereafter. Our subsidiary hospital did not attest as a meaningful electronic records user for FFYs 2020 or 2021.

SunLink’s subsidiary hospital is an eligible hospital under one or more provisions of ACA, ATRA and MARA.

Medicare Outpatient Reimbursement

Most outpatient services provided by general hospitals are reimbursed by Medicare under the outpatient prospective payment system. This outpatient prospective payment system is based on a system of Ambulatory Payment Classifications (“APC”). Each APC is designed to represent a “bundle” of outpatient services, and each APC is assigned a fully prospective reimbursement rate. Medicare pays a set price or rate for each APC group, regardless of the actual cost incurred in providing care. Each APC group rate generally is subject to adjustment each year by an “update factor” based on a market basket of services index. For calendar year 2020, the update factor was 2.6%. For calendar year 2021, the update factor is currently proposed to be 2.6%. If the update factor for current and future periods does not adequately reflect increases in SunLink’s subsidiary hospital cost of providing outpatient services, our financial condition or results of operations could be negatively affected.

Medicare Bad Debt Reimbursement

Under Medicare, the costs attributable to the deductible and coinsurance amounts that remain unpaid by Medicare beneficiaries can be partially added to, and reimbursed as a portion of, the Medicare share of allowable costs as cost reports are filed. Bad debts must meet specific criteria to be allowable. Hospitals generally receive interim pass-through payments during the cost report year which are determined by the respective Medicare Audit Contractor (“MAC”) from the prior cost report filing, and which are finally adjusted when cost reports are filed and audited.

Amounts uncollectible from specific beneficiaries are charged off as bad debts in the accounting period in which the accounts are deemed to be worthless. In some cases, an amount previously written off as a bad debt and allocated to the program may be recovered in a subsequent accounting period. In these cases, the recoveries must be used to reduce the cost of beneficiary services for the period in which the collection is made. In determining reasonable costs for hospitals, the amount of bad debts otherwise treated as allowable costs is currently 35%.

Medicare Disproportionate Share Payments and Upper Payment Limits

In addition to the standard DRG payment, the Social Security Act requires that additional Medicare payments be made to hospitals with a disproportionate share of low-income patients. Beneficiary Improvement and Protection Act (“BIPA”) provisions stipulate that rural facilities with fewer than 100 beds with a disproportionate share percentage greater than 15% will be classified as a disproportionate share hospital and entitled to receive a supplemental disproportionate share payment based on gross DRG payments. The effective rate has been 12.0% of DRG payments in recent years and Trace is classified as a disproportionate share hospital. The Affordable Care Act provides for material reductions in Medicare DSH funding. We estimate that Medicare disproportionate share payments represented less than 1% of our healthcare services net patient service revenues for the years ended June 30, 2021 and 2020.

The Upper Payment Limit (“UPL”) us a federal limit placed on fee-for-service reimbursement of Medicaid payments. Specifically, UPL is the maximum a given State Medicaid program may pay a type of provider in the aggregate statewide in Medicaid fee-for-service. State Medicaid programs cannot claim federal matching dollars for provider payments in excess of the applicable

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UPL. The UPL serves as a cap on State Medicaid program’s total spending on particular providers, most notably hospital, extended care and rehabilitation centers and nursing homes. We that the impact of UPL was payments of $101 in fiscal 2021 and $93 in fiscal 2020.

Medicaid Inpatient and Outpatient Reimbursement

Each state operates a Medicaid program funded jointly by the state and the federal government. Federal law governs the general management of the Medicaid program, but there is wide latitude for states to customize Medicaid programs to fit local needs and resources. As a result, each state Medicaid plan has its own payment formula and recipient eligibility criteria.

In the recent past, Mississippi, in which one of subsidiary operates a hospital and an extended care and rehabilitation center, has initiated increased efforts and implemented initiatives to reduce Medicaid assistance payments. These efforts and reductions often are triggered by an increased effort by CMS to decrease the federal share of payments for Medicaid beneficiaries or by significant increases in program utilization and budgetary pressures on the applicable states. The federal government’s percentage share of each state’s medical assistance expenditures under Medicaid is determined by a formula specified in Medicaid law referred to as the Federal Medical Assistance Percentage (“FMAP”). Medicaid pays providers for inpatient services in a manner similar to the Medicare prospective payment system in that hospitals receive a fixed fee for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, also known as DRGs. These Medicaid DRG payments do not consider a specific hospital’s costs, but are statewide rates adjusted for each hospital's capital cost allotment, and generally are less than the Medicare DRG rate.

Medicaid outpatient services are reimbursed with interim rates based on a facility specific cost to charge ratio. These interim payments are then adjusted subsequent to the end of the cost reporting period to an amount equal to 85.6% of the costs associated with providing care to the Medicaid outpatient population.

If SunLink or our subsidiaries or any of their facilities are found to be in violation of federal or state laws relating to Medicare, Medicaid or similar programs, SunLink or the applicable subsidiary or facility, could be subject to substantial monetary fines, civil penalties and exclusion from future participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on our financial condition or results of operations.

Government Reimbursement Program Administration and Adjustments

The Medicare, Medicaid and TriCare programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review and changing governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments under such programs.

All hospitals participating in the Medicare and Medicaid programs are required to meet certain financial reporting requirements. Federal and state regulations require the submission of annual cost reports covering the revenues, costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.

Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits which may result in adjustments to the amounts initially determined by the subsidiary provider to be due under these reimbursement programs. These audits often require several years to reach the final determination of amounts due. Providers have rights of appeal, and it is common to contest issues raised in audits. Although the final outcome of these audits and the nature and amounts of any adjustments are difficult to predict, we believe that we have made adequate provisions in our financial statements for adjustments that may result from these audits and that final resolution of any contested issues should not have a material adverse effect upon our financial condition or results of operations. Until final adjustment, however, significant issues may remain unresolved and previously determined allowances could become either inadequate or greater than ultimately required.

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In 2005, CMS began using recovery audit contractors (“RACs”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private companies to examine Medicare claims filed by healthcare providers. The RAC program was made permanent by the Tax Relief and Health Care Act of 2006. The ACA expanded the RAC program’s scope to include managed Medicare and Medicaid claims and allows all states to establish programs to contract with RACs by 2011. Currently Mississippi has RAC programs, and our hospital and extended care and rehabilitation center have had requests from the RACs to review claims.

RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old. Claims review strategies used by RACs generally include a review of high dollar claims, including inpatient hospital claims. As a result, a large amount of the total recovered by RACs has come from hospitals. Claims identified as overpayments are subject to an appeals process and the Company’s facilities have routinely appealed RAC overpayment determinations. Under the RAC program, our facilities have experienced no losses in the aggregate from audit adjustments for the fiscal years ended June 30, 2021 and 2020.

RACs are paid a contingency fee based on the overpayments they identify and collect. We expect that the RACs will continue to look closely at claims submitted by our Healthcare Service facilities in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict the results of any future RAC audits.

In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The ACA has increased federal funding for the MIC program since FFY 2011. In addition to RACs and MICs, the state Medicaid agencies and other contractors have also increased their review activities.

Government Reimbursement Programs—Extended Care and Rehabilitation Center, Skilled Nursing Facilities and Nursing Homes

Medicare —The Medicare Part A program provides reimbursement for extended-care services furnished to Medicare beneficiaries who are admitted to extended care and rehabilitation center after at least a three-day stay in an acute care hospital. Covered services include supervised nursing care room and board, social services, physical, speech, and occupational therapies, certain pharmaceuticals and supplies and other necessary services provided by extended care and rehabilitation centers. Medicare payments to our extended care and rehabilitation center were, until October 1, 2019, based upon certain resource utilization grouping (“RUG”) payment rates developed by CMS that provide various levels of reimbursement based upon patient acuity.

Medicare Part B provides reimbursement for certain physician services, limited drug coverage, and other outpatient services, such as therapy and other services, outside of a Medicare Part A covered patient stay. Payment for these services is determined according to the Medicare Physician Fee Schedule (“MPFS”). The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) established Medicare physician reimbursement updates with quality and value measurements and participation in alternative payment models.

Effective October 1, 2019, CMS replaced the prospective payment system for skilled nursing facilities resource utilization grouping, with a new prospective payment system called Patient-Driven Payment Model (“PDPM”).  PDPM bases payment on resident characteristics rather than on services provided.  Each resident’s reimbursement depends on the summation of five case–mix adjusted components (physical therapy, occupational therapy, speech language pathology, nursing, and nontherapy ancillaries), each with its own case-mix groups; application of a variable per day adjustment schedule, which reduces the daily payment for three of the case-mix categories on a sliding scale; and addition of these sums to the non-case-mix adjusted component. PDPM uses the five-day resident assessment for determining the Medicare rate for the resident’s entire Part A stay, eliminating the resource utilization grouping requirement for additional assessments on days 14, 30, 60 and 90.  The rule allows a skilled nursing facility (“SNF”) to reclassify a resident after the five-day assessment under an optional Interim Payment Assessment (“IPA”), but CMS has not yet defined criteria for triggering an IPA.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) implemented a major expansion of the Medicare program through the introduction of a prescription drug benefit (“Medicare Part D”). Under Medicare Part D, dual-eligible patients have their outpatient prescription drug costs covered by this Medicare benefit, subject to certain limitations. Most of our extended care and rehabilitation center patients are dual-eligible patients who qualify for the Medicare drug benefit. Accordingly, Medicaid is no longer a primary payor for the pharmacy services provided to these patients.

On April 1, 2014, the Protecting Access to Medicare Act (“PAMA”) was enacted, which directed CMS to create a value-based purchasing initiative applicable to extended care and rehabilitation center and nursing homes beginning October 1, 2018. The initiative focused on a preventable hospital readmission measure and corresponding preventable hospital readmission rates.

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Extended care and rehabilitation centers and nursing homes are ranked according to performance on this preventable hospital readmission rate, with corresponding incentive payments based upon such ranking. CMS also reduced the Medicare per diem rate by 2% beginning October 1, 2018 in connection with the launch of this initiative.

Federal legislation has imposed various limitations and administrative requirements on Medicare reimbursement, including therapy caps, automatic and specific payment reductions, pre-payment manual claim reviews and other efforts to limit reimbursement. CMS also provides periodic reimbursements updates, including market basket updates, which are often reduced by various factors.

Medicaid —Medicaid is a state-administered program financed by state funds and matching federal funds. The program provides for medical assistance to the indigent and certain other eligible persons. Although administered under broad federal regulations, states are given flexibility to construct programs and payment methods consistent with their individual goals. Accordingly, these programs differ in many respects from state to state.

Our extended care and rehabilitation center provides Medicaid-covered services consisting of rehabilitation services, skilled nursing and extended care, room and board, and social services to eligible individuals. In addition, states may, at their option, cover other services such as physical, occupational, and speech therapies, and pharmaceuticals. Medicaid programs also are subject to statutory and regulatory changes, administrative rulings, interpretations of policy by the state agencies, and certain government funding limitations, all of which may materially increase or decrease the level of program payments to our nursing home. We believe that the payments under many of these programs may not be sufficient on an overall basis to cover the costs of serving certain patients participating in these programs. In addition, Mississippi is experiencing budgetary pressures which have resulted in further reductions to Medicaid payments to our extended care and rehabilitation center.

There continue to be legislative and regulatory proposals that would impose further limitations on government and private payments to providers of healthcare services. Many states are considering or have enacted measures that are designed to reduce their Medicaid expenditures and to make certain changes to private healthcare insurance. As states face budgetary issues, we anticipate further pressure on Medicaid rates that could negatively impact payments to our extended care and rehabilitation center.

In addition, some states (including Mississippi) seek to increase the levels of funding contributed by the federal government to their Medicaid programs through a mechanism known as a provider tax. Under these programs, states levy a tax on healthcare providers, which increases the amount of state revenue available to expend on the Medicaid program. This increase in program revenues increases the payment made by the federal government to the state in the form of matching funds. Consequently, the state then has more funds available to support Medicaid rates for providers of Medicaid covered services. However, states may not necessarily use these funds to increase payments to extended care and rehabilitation center providers. Provider tax plans are subject to approval by the federal government. Although some of these plans have been approved in the past, we cannot assure you that such plans will be approved by the federal government in the future.

 

Nongovernment payments —Nongovernment payment residents in our extended care and rehabilitation care center are limited. Some nongovernment payment residents have financial resources (including insurance coverage) to pay for their services and do not rely on government programs for support. It is important to our business to establish relationships with commercial insurers, managed care health plans, and other long-term private payors and to maintain our reputation with such payors as a provider of quality patient and resident care. We negotiate contracts with purchasers of group healthcare services, including private employers, commercial insurers, and managed care companies. Most payor organizations attempt to obtain discounts from established charges. We focus on demonstrating to these payors how our services can provide them and their customers with the most viable pricing arrangements in circumstances where they may otherwise be faced with funding treatment at higher rates at other healthcare providers. The importance of obtaining contracts with commercial insurers, managed care health plans and other private payors varies among markets, depending on such factors as the number of commercial payors and their relative market strength. Failure to obtain contracts with certain commercial insurers and managed care health plans or reductions in lengths of stay or payments for our services provided to individuals covered by commercial insurance could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Government Reimbursement ProgramsPharmacy

 

The operations of our Pharmacy segment are subject to certain rules implemented by MMA and, in the future, may be subject to other rules previously implemented by MMA with respect to certain providers. Regulations implementing cost containment mandates under MMA reduced the reimbursement for healthcare providers in certain areas for a number of products and services which are also provided by our pharmacy operations and established a competitive bidding program for certain durable medical equipment provided under Medicare Part B in certain areas with the goal of offering beneficiaries access to quality with lower out-of-pockets costs. Competitive bidding is intended to further reduce reimbursement for certain products and will likely decrease the number of companies permitted to serve Medicare beneficiaries beginning in certain designated competitive bidding areas (“CBAs”). CMS implemented a competitive bidding program for Medicare durable medical equipment, prosthetics, orthotics, and supplies

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(“DMEPOS”) products and services in specified CBAs. Pursuant to Sections 1834(a)(1)(F) and 1842(s)(3)(B) of the Social Security Act, Final Rule 1614-F, “Medicare Program: End-Stage Renal Disease Prospective Payment System, Quality Incentive Program, and Durable Medical Equipment, Prosthetics, Orthotics, and Supplies” established the methodology to expand competitive bidding to non-bid areas and to implement national price adjustments to payments for DMEPOS and enteral nutrition products. Under these rules and the resulting expansion plan, CMS has applied competitive bidding prices to claims for DMEPOS and enteral nutrition products in previously non-bid areas covered in Rounds 1, 2 and Round Recompete of the Competitive Bidding Program (CBP). All DMEPOS CBP contracts expired on December 31, 2018. Beginning January 1, 2019, there was a temporary gap in the DMEPOS CBP test that ended December 31, 2020. On March 7, 2019, CMS announced plans to consolidate the CBAs included in the Round 1 2017 and Round 2 Recompete into a single round of competition named Round 2021. Round 2021competed sixteen (16) product categories in 130 CBAs, which, for Louisiana, included the CBAs in New Orleans-Metairie and Baton Rouge. On April 9, 2020, the non-invasive ventilators product category was removed from Round 2021 due to the novel COVID-19 pandemic. On October 27, 2020, CMS announced the Round 2021 single payment amounts (“SPAs”) and began offering contracts for the off-the-shelf (“OTS”) back braces and OTS knee braces product categories in 127 CBAs. All of the Round 2021 SPAs became effective January 1, 2021, and extend through December 31, 2023. All other product categories were removed from Round 2021. CMS is required by law to recompete contracts under the DMEPOS CBP at least once every three years. We cannot assure you that our Pharmacy segment will be able to operate its DMEPOS and enteral nutrition products operations profitably in the future either at the current reimbursement rates, or, if at all, under a competitive bid program.

Under MMA, Medicare Part B, covered drugs and biological products generally are paid based on the average sales price (“ASP”) methodology. The ASP methodology uses quarterly drug pricing data submitted to CMS by drug manufacturers. CMS will supply contractors with the ASP drug pricing files for Medicare Part B drugs on a quarterly basis. Principal products paid under the ASP methodology include certain oncology and renal dialysis drugs. Although, there are exceptions to this general rule which are listed in the latest ASP quarterly change request document and which exceptions generally are paid on a cost basis, such exceptions have not been and are not expected to be material to our operations.

CMS’s outpatient prospective payment system pays for most separately payable Medicare Part B drugs administered in a hospital outpatient setting at a reimbursement level of ASP plus 5% and ASP plus 6% in other settings.

Section 303(d) of the MMA also requires the implementation of a competitive acquisition program (the “Part B CAP”) for Medicare Part B drugs and biological not paid on a cost or prospective payment system basis. The Part B CAP is an alternative to the ASP methodology for acquiring certain Part B drugs which are administered incident to a physician’s services. Currently, the Part B CAP is a voluntary program that offers physicians the option to acquire many injectable and infused drugs they use in their practice from an approved Part B CAP vendor, thus reducing the time and cost of buying and billing for drugs. Currently, the CAP for Part B Drugs and Biologicals is only for injectable and infused drugs currently billed under Part B that are administered in a physician’s office, “incident to” a physician’s service.

At least one Medicaid program has adopted, and other Medicaid programs, some states and some private payors may be expected to adopt, those aspects of the MMA that either result in or appear to result in price reductions for drugs covered by such programs. Adoption of ASP as the measure for determining reimbursement by Medicare and Medicaid programs for additional drugs sold by our Pharmacy Segment operations could reduce revenue and gross margins and could materially affect our current average wholesale price (“AWP”) based reimbursement structure with private payors.

We cannot assure you that the ASP reimbursement methodology will not be repeated or extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by our Pharmacy segment operations or that our Pharmacy segment will be able to operate profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which it operates, or may seek to operate, or that the Pharmacy Segment would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.

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Non-government Reimbursement Arrangements—Pharmacy

Major insurance and commercial payors for pharmacy products and services have taken significant steps in recent years to reduce payments for pharmacy products and services and to reduce the involvement of independent pharmacies in an effort to reduce costs and aggregate product distribution into larger volumes in an effort to better bargain prices with pharmacy manufacturers. In addition, pharmacy benefit managers have evolved to act as the intermediary between payors and patients and they also attempt to limit the prices and involvement of independent pharmacies. Also, large retailers, both pharmacy and general retailers, such as Walgreens, CVS and Wal-Mart, have established bulk purchasing arrangements with pharmacy manufacturers and exclusive or limited participation agreements with pharmacy benefits managers to reduce the costs and volume of drugs provided by independent retail pharmacies. Further, e-commerce sites, such as Amazon and PillPack, are actively seeking to provide pharmaceuticals and DMEPOS products directly to patients via online ordering and remote fulfillment. These non-government reimbursements arrangements have had a negative effect on our Pharmacy segment. Our pharmacy locations seek to counteract these pressures by providing greater services and convenience locally than is provided by remote pharmacy providers. However, there can be no assurance that these non-government reimbursement arrangements will not have an increasingly negative impact on our Pharmacy segment revenues and profitability in the future.

HEALTHCARE REGULATION

Overview

The healthcare industry is governed by an extremely complex framework of federal, state and local laws, rules and regulations, and there continue to be federal and state proposals that would, and actions that do, impose limitations on government and private payments to providers, including community hospitals, extended care and rehabilitation centers, nursing homes and pharmacy operations. In addition, there regularly are proposals to increase co-payments and deductibles from program and private patients. Facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls include what is commonly referred to as “utilization review”. Utilization review entails the review of a patient’s admission and course of treatment by a third party. Historically, utilization review has resulted in a decrease in certain treatments and procedures being performed. Utilization review is required in connection with the provision of care which is to be funded by Medicare and Medicaid and is also required under many managed care arrangements.

Many states have enacted, or are considering enacting, additional measures that are designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Various states have applied, or are considering applying, for a waiver from current Medicaid regulations in order to allow them to serve some of their Medicaid participants through managed care providers. These proposals also may attempt to include coverage for some people who presently are uninsured, and generally could have the effect of reducing payments to hospitals, physicians and other providers for the same level of service provided under Medicaid.

Healthcare Facility Regulation

Certificate of Need Requirements

A number of states require approval for the purchase, construction or expansion of various healthcare facilities, including findings of need for additional or expanded healthcare services. Certificates of Need (“CONs”), which are issued by governmental agencies with jurisdiction over applicable healthcare facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or the addition of services and certain other matters. Mississippi, where a SunLink subsidiary currently operates a hospital and an extended care and rehabilitation center has a CON law that applies to such facilities. States periodically review, modify and revise their CON laws and related regulations. Any violation of state CON laws can result in the imposition of civil sanctions or the revocation of licenses for such facilities. SunLink is unable to predict whether its Healthcare Services subsidiaries will be able to obtain any CONs that may be necessary to accomplish their business objectives in any jurisdiction where such certificates of need are required.

Utilization Review Compliance and Hospital Governance

Our Healthcare Services facilities are subject to, and are required to comply with, various forms of utilization review. In addition, under the Medicare prospective payment system, each state must have a peer review organization to carry out a Federally mandated system of review of Medicare patient admissions, treatments and discharges in hospitals. Medical and surgical services and physician practices are supervised by committees of staff doctors at each healthcare facility, are overseen by each healthcare facility’s local governing board, the primary voting members of which are physicians and community members and are reviewed by quality assurance personnel. The local governing boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures and approve the credentials and disciplining of medical staff members.

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Emergency Medical Treatment and Active Labor Act

The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal law that requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition or is in active labor, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program, the Medicaid program or both. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against that other hospital. Although we believe that our subsidiary hospital complies with EMTALA, we cannot predict whether CMS will implement new requirements in the future and whether Trace will be able to comply with any new requirements. Trace does not offer an emergency department.

Pharmacy Segment Regulation

Overview

The operations of our Pharmacy segment subsidiary are subject to various federal and state statutes and regulations governing their operations, including laws and regulations with respect to the operation of pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substances, cross-jurisdictional sale and distribution of pharmacy products, medical waste disposal, clinical trials and non-discriminatory access. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs, as well as the dispensing of controlled substances. Federal controlled substance laws require us to register our pharmacies and repackaging facilities with the United States Drug Enforcement Administration (“DEA”) and to comply with security, recordkeeping, inventory control and labeling standards in order to dispense controlled substances. Although we believe that the operations of our Pharmacy segment have obtained the permits and/or licenses required to conduct its Pharmacy business as currently conducted, a failure to have the necessary permits and licenses could have a material adverse effect on its Pharmacy business, and our financial condition or results of operations.

Pharmaceutical Distribution

Our Pharmacy subsidiary, in addition to retail pharmacy walk-in customers, distributes pharmaceuticals through a variety of delivery methods, including by mail and express delivery services. Louisiana and many other states have laws and regulations that require out-of-state mail service pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of these state within which the dispensing pharmacy is located. Such laws may adversely affect the ability to expand our Pharmacy operations outside of Louisiana.

However, various state Medicaid programs have enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed in that state. To the extent that such laws or regulations are found to be applicable to the operations of the Pharmacy segment, we believe the operations of our Pharmacy segment comply with them in all material respects. To the extent that any of the foregoing laws or regulations prohibit or restrict the operation of mail service pharmacies and are found to be applicable to the operations of our Pharmacy segment, they could have an adverse effect on its ability to expand our pharmacy operations, which currently are concentrated in Louisiana. A number of state Medicaid programs prohibit the participation in such state’s Medicaid program by either out-of-state retail pharmacies or mail order pharmacies, whether located in-state or out-of-state. Such laws may adversely affect the ability to expand our Pharmacy operations outside of Louisiana.

Advertising and Marketing Regulations

There are also other statutes and regulations which may affect advertising, marketing and distribution of pharmacy products. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail orders within 30 days, and to provide clients with refunds, when appropriate.

General Healthcare Regulations

Drugs and Controlled Substances

Various licenses and permits are required by our subsidiaries’ Healthcare Services and Pharmacy segments operations in order to dispense narcotics and operate pharmacies. All of our subsidiaries are required to register their dispensing operations for permits and/or licenses with, and comply with certain operating and security standards of, the DEA, the United States Food and Drug Administration (“FDA”), state Boards of Pharmacy, state health departments and other state agencies in states where we operate or may seek to operate.

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In addition, our Pharmacy subsidiary is dependent on wholesale suppliers, manufacturers and other distribution sources for the drugs and pharmaceuticals it dispenses, and such distributors are highly regulated and licensed. If the Company’s distribution sources lose their ability to provide pharmaceuticals needed by the Company to service its customers, it could have an adverse impact on the subsidiary’s revenues and profitability.

State controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state’s pharmacy licensing authority. Such standards often address the qualification of an applicant’s personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy technicians employed at each of our dispensing locations also must satisfy applicable state licensing requirements.

Fraud and Abuse, Anti-Kickback and Self-Referral Regulations

Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statutes and regulations. If a Healthcare Services or Pharmacy segment operation fails to comply substantially with the numerous federal laws governing such activities, participation in the Medicare and/or Medicaid programs by the applicable subsidiary or even SunLink generally may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it makes claims to Medicare and/or Medicaid for services not provided or misrepresents actual services provided in order to obtain higher payments; pays money to induce the referral of patients or the purchase of items or services where such items or services are reimbursable under a federal or state health program; fails to report or repay improper or excess payments; or fails to provide appropriate emergency medical screening services to any individual who comes to a hospital’s campus or otherwise fails to properly treat and transfer emergency patients.

Hospitals continue to be one of the primary focus areas of the Office of the Inspector General (“OIG”) of the United States and other governmental fraud and abuse programs and the OIG has issued and periodically updates compliance program guidance for hospitals. Each federal fiscal year, the OIG also publishes a General Work Plan that provides a brief description of the activities that the OIG plans to initiate or continue with respect to the programs and operations of the Department of Health and Human Services (“HHS”) and details the areas that the OIG believes are prone to fraud and abuse.

Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as the “anti-kickback” statute, prohibit certain business practices and relationships that might influence the provision and cost of healthcare services reimbursable under Medicare, Medicaid, TriCare or other healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be funded by Medicare or other government programs. Sanctions for violating the anti-kickback statute include criminal penalties and civil sanctions, including fines and possible exclusion from future participation in government programs, such as Medicare and Medicaid. HHS has issued regulations that create safe harbors under the anti-kickback statute. A given business arrangement that does not fall within an enumerated safe harbor is not per se illegal; however, business arrangements that fail to satisfy the applicable safe harbor criteria are subject to increased scrutiny by enforcement authorities.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. These laws cover all health insurance programs, private as well as governmental. In addition, HIPAA broadened the scope of certain fraud and abuse laws, such as the anti-kickback statute, to include not just Medicare and Medicaid services, but all healthcare services reimbursed under a federal or state healthcare program. Finally, HIPAA established enforcement mechanisms to combat fraud and abuse. These mechanisms include a bounty system, where a portion of the payment recovered is returned to the government agencies, as well as a whistleblower program, where a portion of the payment received is paid to the whistleblower. HIPAA also expanded the categories of persons that may be excluded from participation in federal and state healthcare programs.

There is increasing scrutiny by law enforcement authorities, the OIG, the courts and the U.S. Congress of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as mechanisms to exchange remuneration for patient-care referrals and opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction and to reinterpret the underlying purpose of payments between healthcare providers and potential referral sources. Enforcement actions have increased, as is evidenced by highly publicized enforcement investigations of certain hospital activities.

In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services with which the physicians or their immediate family members have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. A person making a referral, or seeking payment for services referred, in violation of the Stark Act is subject to civil monetary penalties of up to $15 for each service; restitution of any amounts received for illegally billed claims; and/or exclusion from future participation in the Medicare program, which can subject the person or entity to exclusion from future participation in state healthcare programs.

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Further, if any physician or entity enters into an arrangement or scheme that the physician or entity knows or should have known has the principal purpose of assuring referrals by the physician to a particular entity, and the physician directly makes referrals to such entity, then such physician or entity could be subject to a civil monetary penalty of up to $100. Compliance with and the enforcing of penalties for violations of these laws and regulations is changing and increasing. For example, CMS has issued a “self-referral disclosure protocol” for hospitals and other providers that wish to self-disclose potential violations of the Stark Act and attempt to resolve those potential violations and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute. In light of the provisions of the Affordable Care Act that created potential liabilities under the Federal False Claims Act (discussed below) for failing to report and repay known overpayments and return an overpayment within sixty (60) days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later, hospitals and other healthcare providers are encouraged to disclose potential violations of the Stark Act to CMS. It is likely that self-disclosure of Stark Act violations will increase in the future. Finally, many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care.

The Federal False Claims Act and Similar State Laws

The Federal False Claims Act prohibits providers from, among other things, knowingly submitting false or fraudulent claims for payment to the federal government. The False Claims Act defines the term “knowingly” broadly, and while simple negligence generally will not give rise to liability, submitting a claim with reckless disregard to its truth or falsity can constitute the “knowing” submission of a false or fraudulent claim for the purposes of the False Claims Act. The “qui tam” or “whistleblower” provisions of the False Claims Act allow private individuals to bring actions under the False Claims Act on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years. When a private party brings a qui tam action under the False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation. If a provider is found to be liable under the False Claims Act, the provider may be required to pay up to three times the actual damages sustained by the government plus mandatory civil monetary penalties of between $5 to $11 for each separate false claim. The government has used the False Claims Act to prosecute Medicare and other government healthcare program fraud, such as coding errors, billing for services not provided, submitting false cost reports, and providing care that is not medically necessary or that is substandard in quality.

HIPAA Transaction, Privacy and Security Requirements

HIPAA and federal regulations issued pursuant to HIPAA contain, among other measures, provisions that have required SunLink and our subsidiaries to implement modified or new computer systems, employee training programs and business procedures. The federal regulations are intended to encourage electronic commerce in the healthcare industry, provide for the confidentiality and privacy of patient healthcare information and ensure the security of healthcare information.

A violation of the HIPAA regulations could result in civil money penalties of $1 per incident, up to a maximum of $25 per person, per year, per standard violated. HIPAA also provides for criminal penalties of up to $50 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100 and five years in prison for obtaining protected health information under false pretenses and up to $250 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Since there is limited history of enforcement efforts by the federal government at this time, it is difficult to ascertain the likelihood of enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties, which may result from any violation of the regulations.

HIPAA Privacy Regulations

HIPAA privacy regulations protect the privacy of individually identifiable health information. The regulations provide increased patient control over medical records, mandate substantial financial penalties for violation of a patient’s right to privacy and, with a few exceptions, require that an individual’s individually identifiable health information only be used for healthcare-related purposes. These privacy standards apply to all health plans, all healthcare clearinghouses and healthcare providers, such as our subsidiaries’ facilities, that transmit health information in an electronic form in connection with standard transactions and apply to individually identifiable information held or disclosed by a covered entity in any form. These standards impose extensive administrative requirements on our subsidiaries’ facilities and require compliance with rules governing the use and disclosure of such health information, and they require our subsidiaries’ facilities to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on behalf of our subsidiaries’ facilities. In addition, our subsidiaries’ facilities are subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by state and could impose stricter standards and additional penalties.

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The HIPAA privacy regulations also require healthcare providers to implement and enforce privacy policies to ensure compliance with the regulations and standards. In conjunction with a private HIPAA consultant and HIPAA coordinators at each facility, individually tailored policies and procedures were developed and implemented and HIPAA privacy educational programs are presented to all employees and physicians at each facility. We believe all of our subsidiaries’ facilities are in compliance with current HIPAA privacy regulations.

HIPAA Electronic Data Standards

The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for all healthcare related electronic data interchange. These provisions are intended to streamline and encourage electronic commerce in the healthcare industry. Among other things, these provisions require Healthcare Services to use standard data formats and code sets established by HHS when electronically transmitting information in connection with certain transactions, including health claims and equivalent encounter information, healthcare payment and remittance advice and health claim status.

The HHS regulations establish electronic data transmission standards that all healthcare providers and payors must use when submitting and receiving certain electronic healthcare transactions. The uniform data transmission standards are designed to enable healthcare providers to exchange billing and payment information directly with the many payors thereby eliminating data clearinghouses and simplifying the interface programs necessary to perform this function. We believe that the management information systems at our subsidiaries comply with HIPAA’s electronic data regulations and standards.

HIPAA Security Standards

The Administrative Simplification Provisions of HIPAA require the use of a series of security standards for the protection of electronic health information. The HIPAA security standards rule specifies a series of administrative, technical and physical security procedures for covered entities to use to assure the confidentiality of electronic protected health information. The standards are delineated into either required or addressable implementation specifications.

In conjunction with a consortium of rural hospitals, private HIPAA security consultants and HIPAA security officers at each facility, our subsidiaries have performed security assessments and implemented individually tailored plans to apply required or addressable solutions and implemented a set of security policies and procedures. In addition, our subsidiaries developed and adopted an individually tailored comprehensive disaster contingency plan for each facility and presented a HIPAA security training program to all applicable personnel. We believe SunLink and our subsidiaries are in compliance with all aspects of the HIPAA security regulations.

HIPAA National Provider Identifier

HIPAA also required HHS to issue regulations establishing standard unique health identifiers for individuals, employers, health plans and healthcare providers to be used in connection with standard electronic transactions. All healthcare providers, including our facilities, were required to obtain a new National Provider Identifier (“NPI”) to be used in standard transactions instead of other numerical identifiers by May 23, 2007. Our facilities implemented use of a standard unique healthcare identifier by utilizing their employer identification number. HHS has not yet issued proposed rules that establish the standard for unique health identifiers for health plans or individuals. Once these regulations are issued in final form, we expect to have approximately one to two years to become fully compliant but cannot predict the impact of such changes at this time. We cannot predict whether our facilities may experience payment delays during the transition to the new identifiers. HHS is currently working on the standards for identifiers for health plans; however, there are currently no proposed timelines for issuance of proposed or final rules. The issuance of proposed rules for individuals is on hold indefinitely.

Medical Waste Regulations

Our operations, especially our Healthcare Services facility operations, generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations are also generally subject to various other environmental laws, rules and regulations. Based on our current level of operations, we do not anticipate that such compliance costs will have a material adverse effect on our cash flows, financial position or results of operations.

Regulatory Compliance Program

Our subsidiaries maintain compliance programs under the direction of a risk manager. The compliance programs are directed at all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, as well as Pharmacy segment operations. Our Healthcare Services and Pharmacy segments’ operations each have one or more compliance officers and develop remediation plans to correct problems should they arise. In addition, all employees are provided with a copy of

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and given an introduction to the subsidiary’s Code of Conduct, which includes ethical and compliance guidelines and instructions about the proper resources to utilize in order to address any concerns that may arise. Our Healthcare Services and Pharmacy segment operations conduct annual training to re-emphasize its Code of Conduct and monitor its compliance program to respond to developments in healthcare regulations and the industry. A toll-free hotline is also maintained to permit employees to report compliance concerns on an anonymous basis.

Professional Liability

As part of our business, our subsidiaries are subject to claims of liability for events occurring in the ordinary course of operations. To cover a portion of these claims, professional malpractice liability insurance and general liability insurance are maintained in amounts which are commercially reasonably available and believed to be sufficient for operations as currently conducted. Nevertheless, some claims may exceed the scope or amount of the coverage in effect.

The recorded liability for professional liability risks of our subsidiaries’ operations includes an estimate of liability for claims, including claims retained after the disposition of any facility or operations or claims assumed in connection with the acquisition of any facility or operations. These estimates are based on actuarially determined amounts.

Environmental Regulation

We believe our subsidiaries are in substantial compliance with applicable federal, state and local environmental regulations. To date, compliance with federal, state and local laws regulating the discharge of material into the environment or otherwise relating to the protection of the environment have not had a material effect upon our results of operations, financial condition or competitive position. Similarly, we have not had to make material capital expenditures to comply with such regulations.

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INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Our executive officers, as of September 23, 2021, their positions with the Company or its subsidiaries and their ages are as follows:

 

Name

 

Offices

 

Age

Robert M. Thornton, Jr.

 

Director, Chairman of the Board of Directors, President and Chief Executive Officer

 

72

Mark J. Stockslager

 

Chief Financial Officer and Principal Accounting Officer

 

62

Sheila G. Brockman

 

Byron D. Finn

 

Vice President – SunLink Health Systems, Inc., Chief Executive Officer – Southern Health Corporation of Houston, Inc.

President—SunLink ScriptsRx, LLC

 

61

 

71

 

All of our executive officers hold office for an indefinite term, subject to the discretion of the Board of Directors.

Robert M. Thornton, Jr. has been Chairman and Chief Executive Officer of SunLink Health Systems, Inc. since September 10, 1998, President since July 16, 1996 and was Chief Financial Officer from July 18, 1997 to August 31, 2002. From March 1995 to the present, Mr. Thornton has been a private investor in and Chairman and Chief Executive Officer of CareVest Capital, LLC, a private investment and management services firm. Mr. Thornton was President, Chief Operating Officer, Chief Financial Officer and a director of Hallmark Healthcare Corporation (“Hallmark”) from November 1993 until Hallmark’s merger with Community Health Systems, Inc. in October 1994. From October 1987 until November 1993, Mr. Thornton was Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a director of Hallmark.

Mark J. Stockslager has been Chief Financial Officer of SunLink Health Systems, Inc. since July 1, 2007. He was interim Chief Financial Officer from November 6, 2006 until June 30, 2007. He has been the Principal Accounting Officer since March 11, 1998 and was Corporate Controller from November 6, 1996 to June 4, 2007. He has been associated continuously with our accounting and finance operations since June 1988 and has held various positions, including Manager of U.S. Accounting, from June 1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager was employed by Price Waterhouse & Co.

Sheila G. Brockman has been Vice President of SunLink Health Systems, Inc. since November 11, 2019 and the Chief Executive Officer of Southern Health Corporation of Houston, Inc. since February 11, 2020. Ms. Brockman was the CEO of Southern Health Corporation of Ellijay, Inc. from April 1, 2017 until its sale on March 17, 2019. She has been continuously with SunLink since July 7, 2003, with a variety of responsibilities including mergers and acquisitions and risk management. Prior to 2003, Ms. Brockman held various financial and management positions in several wireless technology and civil engineering companies.  

Byron D. Finn was named President of SunLink ScriptsRx, LLC on October 1, 2010. Mr. Finn was most recently president of Byron D. Finn, CPA, PC, which provided accounting, financial consulting and litigation support services to its clients, including numerous healthcare clients. His experience also includes various positions with The Coca-Cola Company, where he served in a number of financial-related positions and in connection with special projects, and he was previously employed by Ernst & Young. Mr. Finn is a licensed CPA and received his BA in Business Administration and Master in Accountancy degrees from the University of Georgia.

Item 1A.

Risk Factors

In addition to other information contained in this Annual Report, including certain cautionary and forward-looking statements, you should carefully consider the following factors in evaluating an investment in SunLink:

Consolidated Operations Risks

The COVID-19 pandemic has significantly increased economic uncertainty.

The continued spread of COVID-19 may exacerbate or extend the current adverse economic environment for healthcare providers, and it is possible that it could cause a broader economic downturn. While certain healthcare spending is considered non-discretionary and may not be significantly impacted by economic downturns, healthcare spending has been adversely impacted by such conditions. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose a high-deductible insurance plan or no insurance at all, which increases a hospital’s dependence on self-pay revenue. Moreover, a greater number of persons may elect to forgo treatments and therapies provided by SunLink’s hospital, clinics, extended care and rehabilitation center, and Specialty Pharmacy business. As a result of the COVID-19 pandemic, the Company and its subsidiaries may experience increases in costs relating to less efficient operating procedures, increased cost of supplies, and salaries, wages and benefits. Accordingly, the continuing impact of the pandemic could result in an increase in uncollectible self-pay revenues and a decreased in patient volumes at Trace Regional Hospital and Trace Extended Care and Rehabilitation Center, as well as decreased sales volume by SunLink’s Specialty Pharmacy business.

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If our operations generate operating losses, we may not be able to generate sufficient cash flows to meet our liquidity needs.

We rely upon cash on hand, cash from operations, and cash from asset sales to fund our cash requirements for working capital, capital expenditures, commitments, and payments of principal and interest on borrowings. Our ability to generate cash from operations has been negatively impacted by reduced federal and state reimbursements, managed care efforts (including restrictions, limitations, administrative requirements and clawbacks in both our Healthcare Services and Pharmacy businesses), uncollectible self-pay net revenues of our Healthcare Services segment, increased salary expenses for employed physicians, and decreased patient volume at our facilities as a result of economic conditions in the locations we serve, as well as by decreased sales volume and earnings experienced by certain lines of business in our Pharmacy segment, and by our corporate overhead. A substantial portion of corporate overhead is incurred because we are a public company with limited operations. We expect that these factors will continue to have a negative impact on our business for the foreseeable future. The impact of these factors has been mitigated by government support payments (PPP loans and Provider Relief Funds) during the COVID-19 pandemic which payments are not recurring.  The COVID-19 pandemic has resulted in reduced capacity of our physicians and healthcare providers in both our Healthcare Services and Pharmacy segments. Further deterioration in our operating environment and the absence of new government support payments to address such deterioration would negatively impact our results of operations and cash flows.

SunLink may require additional debt or equity capital in order to make significant capital investments including to expand our operations and make acquisitions, and the inability to make significant capital investments or expand our operations may negatively affect SunLink’s competitive position, reduce earnings (or increase losses), and negatively affect our results of operations and financial position.

SunLink’s operations and growth strategy may require significant capital investments from time to time. Significant capital investments may be required for on-going and planned capital improvements in connection with existing operations and for future acquired operations. SunLink’s ability to make capital investments depends on numerous factors, such as the availability of funds from operations and access to additional debt and equity financing. No assurance can be given that the necessary funds will be available. Moreover, incurrence of additional debt financing, if available, may involve additional restrictive covenants that could negatively affect SunLink’s ability to operate its business in the desired manner, and raising additional equity likely would be dilutive to shareholders. The failure to obtain necessary funds could impair SunLink’s existing operations and could force SunLink to forego opportunities that may arise in the future. This could, in turn, have a negative impact on the competitive position of our operating subsidiaries, reduce earnings (or increase losses) and negatively affect our results of operations and financial position.

Healthcare reform initiatives have resulted in significant changes to the United States healthcare system some of which may adversely affect our business.

Healthcare reform initiatives, including the enactment of the ACA, managed Medicaid initiatives, and commercial managed healthcare programs (including those relating to acute care services, diagnostic procedures and tests, laboratory services, drug formularies, pharmacy dispensing, and other programs) have impacted each of our businesses in some manner. The reforms are very significant and, ultimately, could further change the nature of our services, the methods and amounts of payment for our services, and the underlying regulatory environment.

In general, a primary goal of recurrent efforts at healthcare reform is to reduce the cost to federal and state governments of reimbursement to providers under various governmental programs, which includes reductions in the reimbursement paid to us and other healthcare providers. Moreover, healthcare reform could negatively impact insurance companies, other third-party payors and our customers, as well as other healthcare providers, which may in turn negatively impact our business. As such, healthcare reforms and changes resulting from the ACA, as well as other similar healthcare reforms, could have a material adverse effect on our business, financial position, results of operations, and liquidity.

SunLink conducts business in a heavily regulated industry; changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce revenue and profitability.

The healthcare industry is subject to extensive federal, state and local laws and regulations relating to licensure; conduct of operations including patient referrals, physician recruiting practices, pharmacy operations, cost reporting and billing practices; ownership, condition and operation of facilities; addition of facilities and services; confidentiality, maintenance, and security issues associated with medical records; billing for services; and prices for services.

These laws and regulations are extremely complex, and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations, including in particular, Medicare and Medicaid anti-fraud and abuse amendments, codified in Section 1128B(b) of the Social Security Act and known as the “anti-kickback statute.” This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent to generate referrals of orders for services or items reimbursable under Medicare, Medicaid, and other federal healthcare programs.

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HHS regulations describe some of the conduct and business relationships immune from prosecution under the anti-kickback statute. The fact that a given business arrangement does not fall within one of these “safe harbor” provisions does not render the arrangement illegal. However, business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria risk increased scrutiny by enforcement authorities.

We have a variety of financial relationships with physicians who refer patients to our subsidiary’s hospital. We have contracts with physicians providing services under a variety of financial arrangements such as employment contracts and professional service agreements. We also provide financial incentives, including loans and minimum revenue guarantees, to recruit physicians into the communities served by our subsidiaries’ facilities and other operations.

HIPAA broadened the scope of the fraud and abuse laws to include all healthcare services, whether or not they are reimbursed under a federal program. In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services in which the physicians or their immediate family members have an ownership interest or certain other financial arrangements.

Due to the “opioid crisis”, the Drug Enforcement Administration (“DEA”) has added regulations and increased its scrutiny of drug dispensing at both the retail and wholesale level.  As a result, physicians and pharmacists are more cautious about dispensing certain drugs and wholesalers monitor drug purchases by their customers.  In addition, wholesalers are more closely monitored by the DEA and may limit the volume and delivery of drugs.

In addition, SunLink’s facilities will continue to remain subject to any state laws that are more restrictive than the regulations issued under HIPAA, which vary by state and could impose additional penalties. In recent years, both federal and state government agencies have announced plans for or implemented heightened and coordinated civil and criminal enforcement efforts.

Government officials charged with responsibility for enforcing healthcare laws could assert that SunLink or any of the transactions in which the Company, or its subsidiaries or their predecessors is or was involved, are in violation of these laws. It is also possible that these laws ultimately could be interpreted by the courts in a manner that is different from the interpretations made by the Company or others. A determination that either SunLink or its subsidiaries or their predecessors is or was involved in a transaction that violated these laws, or the public announcement that SunLink or its subsidiaries or their predecessors is being investigated for possible violations of these laws, could have a material adverse effect on SunLink’s business, financial condition, results of operations or prospects and SunLink’s business reputation could suffer significantly.

The industry trend towards value-based purchasing may negatively impact our revenues.

There is a trend in the healthcare industry toward “value-based” purchasing of healthcare products and services (including drugs). These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided. Governmental programs, including Medicare and Medicaid, currently require providers under such programs to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payors currently require providers under such programs to report quality data, and several commercial payors do not reimburse providers under such programs for certain preventable adverse events.

The ACA contains a number of provisions intended to promote value-based purchasing. The ACA prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital acquired conditions (“HACs”), conditions that are acquired by a patient while admitted as an inpatient at a hospital, such as a surgical site infection. Hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard.

The ACA also requires HHS to implement a value-based purchasing program for inpatient hospital services. The ACA requires HHS to reduce inpatient hospital payments for all discharges by a percentage which currently is 2%. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine from the pool of dollars created by these payment reductions the amount our subsidiary’s hospital will receive if it meets or exceeds the quality performance standards.

We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our results of operations, but it could negatively impact our financial condition or results of operations.

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Reforms in Pharmacy distribution and dispensing have impacted and may further impact our Pharmacy business

      

Pharmacy benefit managers have undertaken a number of actions, primarily in an effort to reduce cost and increase their own profitability, which have impacted our Pharmacy segment business. These actions include limiting reimbursable drug formularies, requiring outcome and quality reporting, and implementing claw backs, takebacks and penalties for alleged and substantially defined noncompliance with various contract terms, some of which may not be known at the time a prescription is filled. In addition, pharmacy benefit managers and manufacturers have limited the drugs which independent pharmacies (including our pharmacy subsidiary) may dispense and receive reimbursement for; and in some cases have determined not to contract with independent pharmacies for dispensing services at all, preferring to provide “direct-to-consumers” type distribution.  In addition, the recent purchase or merger of pharmacy benefit companies and insurance companies effectively allows the combined business to control distribution, dispensing, pricing and payment of drugs from the manufacturer to the consumer.  This “vertical integration” of the pharmacy distribution and dispensing system in the United States could have the effect of eliminating independent pharmacies, limiting the drugs available for dispensing to patients, and may reduce prices below dispensing costs.  Any of these pharmacy reforms could result in an adverse effect on our Pharmacy segment business.

 

General economic conditions.

Much healthcare spending is discretionary and can be significantly impacted by economic downturns. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose to defer or forego elective surgeries and other non-emergent procedures, which are generally more profitable lines of business for hospitals. In addition, employers may impose, or patients may select a high-deductible insurance plan or no insurance at all, which increases a hospital’s dependence on self-pay revenue.

We are unable to quantify the specific impact of the COVID-19 pandemic or current or recent economic conditions on our business; however, we believe that the economic conditions in the rural service areas in which our subsidiaries operate have had an adverse impact on our operations. Such impact can be expected to continue to affect not only the healthcare decisions of our patients and potential patients but could also have an adverse impact on the solvency of certain managed care providers and other counterparties to transactions with us.

Our subsidiaries are subject to potential claims for professional liability, including existing or potential claims based on the acts or omissions of third parties, which claims may not be covered by insurance.

Our subsidiaries are subject to potential claims for professional liability (medical malpractice) in connection with current operations, as well as potentially acquired or discontinued operations. Such potential claims increased as a result of the COVID-19 pandemic.  To cover such claims, professional malpractice liability insurance and general liability insurance is maintained in amounts believed to be sufficient for operations, although some claims may exceed the scope or amount of the coverage in effect and insurance may add limitations and exclusions to such insurance. However, SunLink currently purchases limited insurance policies to cover discontinued operations exposures. We may purchase such insurance in the future at levels providing for the retention of more risk by us and at lower aggregate limits. The assertion of a significant number of claims, either within a self-insured retention (deductible) or individually or in the aggregate in excess of available insurance, could have a material adverse effect on our results of operations or financial condition. Premiums for professional liability insurance have historically been volatile, and we cannot assure you that professional liability insurance will continue to be available on terms acceptable to us, if at all. The operations of our hospital and pharmacies also depend on the professional services of physicians, pharmacists and other trained healthcare providers and technicians in the conduct of their respective operations, including independent laboratories and physicians rendering diagnostic and medical services. There can be no assurance that any legal action stemming from the act or omission of a third party provider of healthcare services, would not be brought against our subsidiaries’ hospital, pharmacies, or SunLink, resulting in significant legal expenses in order to defend against such legal action or to obtain a financial contribution from the third-party whose acts or omissions occasioned the legal action.

SunLink depends heavily on its management personnel and the loss of the services of one or more of SunLink’s key senior management personnel could weaken SunLink’s management team.

SunLink has been, and will continue to be, dependent upon the services and management experience of its executive officers. If any of SunLink’s executive officers were to resign their positions or otherwise be unable to serve, SunLink’s management could be weakened.

25


Risks Related to Our Operations

SunLink has a limited staff of corporate employees and depends heavily on its corporate staff and subsidiaries’ management personnel; the loss of the services of one or more of SunLink’s key personnel could weaken SunLink’s management team and impair its ability to deliver healthcare services and pharmacy products and services.

The success of our operations depends on the ability to attract and retain managers, related health care employees and information technology staff, as well as on the ability of subsidiary-based officers and key employees to manage growth successfully. SunLink’s subsidiaries have been able to attract healthcare subsidiary management; however, if the subsidiaries or corporate staff is unable to attract and retain effective management, the operating performance could decline.

SunLink’s success depends on the ability of our operating subsidiaries to attract and retain qualified healthcare professionals. A shortage of qualified healthcare professionals including physicians, mid-level healthcare practitioners (such as physician assistants, or nurse practitioners) and pharmacists in any of our markets could weaken the ability of our subsidiaries to deliver healthcare services.

In addition to the management personnel which each subsidiary employs, our Healthcare Services operations are dependent on the efforts, ability, and experience of our healthcare professionals, such as physicians, nurses, therapists, pharmacists and lab technicians. Nurses, pharmacists, lab technicians and other healthcare professionals are generally employees of an individual subsidiary. Each subsidiary’s success has been, and will continue to be, influenced by its ability to attract and retain these skilled employees. A shortage of healthcare professionals in one of our markets, the loss of some or all of its key employees or the inability to attract or retain sufficient numbers of qualified healthcare professionals could cause the operating performance of one or more of our subsidiaries to decline. As a result of the COVID-19 pandemic, the Healthcare Services and Pharmacy segments have both experienced reduced capacity and absences by healthcare providers.

The majority of SunLink’s revenue is dependent on Medicare and Medicaid payments to its subsidiaries and possible reductions in Medicare or Medicaid payments or the implementation of other measures to reduce reimbursements may reduce our revenues.

The majority of SunLink’s consolidated revenues are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. Approximately 71% and 71% of net consolidated revenues was derived from the Medicare and Medicaid programs for the years ended June 30, 2021 and June 30, 2020, respectively. Previous legislative changes have resulted in, and future legislative changes may result in, limitations on and reduced levels of payment and reimbursement for a substantial portion of hospital procedures, pharmacy services and costs. Mississippi has not expanded Medicaid or set-up healthcare exchanges.

Future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs may have a material adverse effect on our consolidated business, financial condition, results of operations or prospects.

Revenue and profitability of our subsidiaries’ operations may be constrained by future cost containment initiatives undertaken by purchasers of such services.

Our subsidiaries’ have been affected by the increasing number of initiatives undertaken during the past several years by all major purchasers of healthcare, including (in addition to federal and state governments) insurance companies, pharmacy benefit managers and employers, to revise payment methodologies and monitor healthcare expenditures in order to contain healthcare costs. Our community hospital operations derived approximately 16% and 17% of their consolidated net patient revenues for the fiscal year ended June 30, 2021 and June 30, 2020, respectively, from private payors and other non-governmental sources who contributed less than 5% of consolidated patient days. Initiatives such as managed care organizations offering prepaid and discounted medical services packages, have adversely affected hospital revenue growth throughout the country and such packages represent an increasing portion of our subsidiary’s hospital’s admissions and outpatient revenues and have resulted in reduced revenue growth at our current and former subsidiaries’ hospitals. In addition, private payors increasingly are attempting to control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations and preferred provider organizations, referred to as PPOs. If our subsidiaries, specifically our hospital subsidiary operations, are unable to contain costs through increased operational efficiencies and the trend toward declining reimbursements and payments continues, the results of our Healthcare Services facility segment operations and cash flow will be adversely affected and the results of our consolidated operations and our consolidated cash flow similarly likely would be adversely affected.

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A cyber-attack or security breach could result in the compromise of our facilities, confidential data or critical data systems and give rise to potential harm to patients, remediation and other expenses, expose us to liability under HIPAA, consumer protection laws, common law or other theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business.

We rely extensively on our computer systems to manage clinical and financial data, communicate with our patients, payors, vendors and other third parties and summarize and analyze operating results. We have made investments in technology to protect our systems, equipment and medical devices and information from cybersecurity risks including continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access. Also in connection with any cyber-attack, we likely would be subject to one or more purported class action lawsuits, as well as government investigations by various State Attorneys General and the U.S. Department of Health and Human Services Office for Civil Rights, and could be subject to additional litigation, potential governmental inquiries and potential reputation damages.

In spite of our security measures, there can be no assurance that we will not be subject to cyber-attacks or security breaches in the future. Additionally, where we agree to provide transition services to the buyer in connection with the sale of assets, including access to our legacy information systems, for a defined transition period, we are exposed to cyber-attacks or security breaches that originate outside of our processes and practices designed to prevent such threats from occurring. Any such cyber-attacks or security breaches could impact the integrity, availability or privacy of protected health information or other data subject to privacy laws or disrupt our information technology systems, devices or business, including our ability to provide various healthcare services. Additionally, growing cyber-security threats related to the use of ransomware and other malicious software threaten the access and utilization of critical information technology and data. As a result, cybersecurity and the continued development and enhancement of our controls, process and practices designed to protect our information systems from attack, damage or unauthorized access likely will be required. Our ability to recover from a ransomware or other cyber-attack is dependent on these practices, including successful backup systems and other recovery procedures. As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. If we are subject to cyber-attacks or security breaches in the future, this could result in harm to patients; business interruptions and delays; the loss, misappropriation, corruption or unauthorized access of data; litigation and potential liability under privacy, security, breach notification and consumer protection laws or other applicable laws; reputational damage and federal and state governmental inquiries, any of which could have an adverse effect on our business, financial condition or results of operations.

 

Continuing worsening or additional pandemics, epidemics or outbreaks of an infectious disease in the markets in which we operate or that otherwise impacts our facilities could adversely impact our business.

In additional to the current COVID-19 pandemic, if one or more additional pandemics, epidemics, or outbreaks of an infectious disease or other public health crisis were to affect our markets, our business could be adversely affected. Any such crisis could diminish the public trust in healthcare facilities, especially in facilities that fail to accurately or timely diagnose or isolate infected persons, or that are treating (or have treated) patients affected by contagious diseases. If any of our facilities were involved in treating patients for such a contagious disease, other patients might cancel elective procedures or fail to seek needed care at our facilities. Further, an additional pandemic might adversely impact our business by causing a temporary shutdown or diversion of patients, by disrupting or delaying production and delivery of materials and products in the supply chain or by causing staffing shortages in our facilities. In particular, while it is uncertain the extent to which the coronavirus may impact our business, given that a portion of pharmaceuticals and medical supplies used at our facilities are sourced from China, in the event that the coronavirus outbreak or another infectious disease outbreak, or any actions taken by the Chinese government or other governmental authorities in connection therewith, were to disrupt the supply of these pharmaceuticals and/or medical supplies, then our business could be adversely affected. In addition, although we have disaster plans in place and operate pursuant to infectious disease protocols, the potential impact of a worsening of the COVID-19 pandemic or additional pandemics, epidemics or outbreaks of an infectious disease with respect to our markets or our facilities is difficult to predict and could adversely impact our business.

Our Healthcare Services operations face intense competition from other hospitals and extended care and rehabilitation centers and nursing homes which directly affect such segment and consolidated revenues and profitability.

Although Trace operates in a community where it is currently the only general, acute care hospital, it faces substantial competition from other hospitals, including larger tertiary care centers. Although these competing hospitals may be as far as 30 to 50 miles away, patients in Trace’s market migrate to these competing facilities as a result of local physician referrals, managed care plan incentives or personal choice.

Our Trace Extended Care and Rehabilitation Center also competes on a local and regional basis with other facilities providing similar services, including hospitals, extended care and rehabilitation centers, nursing home, assisted living facilities, home health agencies, and similar institutions. Some competitors may operate newer facilities and may provide services, including skilled nursing services, that we do not offer. Our competitors include government-owned, religious organization-owned, secular nonprofit and for-profit institutions. Many of these competitors have greater financial and other resources than we do. Although there is limited, if any, price competition with respect to Medicare and Medicaid residents (since revenues received for services provided to these residents are generally based on pre-established rates), there is substantial price competition for private payment residents.

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The Healthcare Services business is highly competitive and competition among hospitals, extended care and rehabilitation centers, nursing homes and other healthcare providers for patients has intensified in recent years. Some of these competing facilities offer services which are not offered by SunLink’s subsidiaries’ facilities. Some of the competing facilities are owned or operated by tax-supported governmental bodies or by private not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis and are exempt from sales, property, and income taxes. SunLink’s subsidiaries also face competition from other for-profit healthcare companies, some of which have substantially greater resources, as well as other providers, such as outpatient surgery and diagnostic centers and home health agencies.

The intense competition from other providers of Healthcare Services directly affects the market share of our subsidiaries’ facilities, as well as their and our revenues and profitability.

Changes in market demographics may increase competition for certain of our Healthcare Services subsidiaries.

We cannot assure you that we will have the financial resources to fund capital improvements to our Trace facility or any other subsidiary, which may face additional competition, or that even if financial resources are available to us, that projected operating results will justify such expenditures. An inability to fund or the infeasibility of funding capital improvements could directly or indirectly have an adverse impact on our revenues through lower utilization, increased difficulty in the recruitment of physicians or other service providers and otherwise as a result of increased competition.

SunLink’s subsidiaries’ Healthcare Services may be subject to, and depend on, certificate of need laws which could affect their ability to operate profitably.

Mississippi currently has laws requiring approval for the purchase, construction or expansion of various Healthcare Services including hospitals, extended care and rehabilitation centers, nursing homes and ambulatory surgery centers and the provision of various services. Under such certificate of need (“CON”) laws, prior state approval is required for the acquisition of major medical equipment or the purchase, lease, construction, expansion, sale or closure of covered healthcare facilities, based on a determination of need for additional or expanded facilities or services. The failure to obtain any required CON may impair SunLink’s subsidiaries’ ability to operate profitably.

In addition, the elimination or modification of CON laws in Mississippi, where our hospital and extended care and rehabilitation center operates, could subject such facilities to greater competition making it more difficult to operate profitably.

The success of SunLink’s hospital subsidiary depends upon that subsidiary’s hospital’s ability to maintain good relationships with the physicians and, if the hospital is unable to successfully maintain good relationships with physicians, admissions and outpatient revenues may decrease and operating performance could decline.

Because physicians generally direct the majority of hospital admissions and outpatient services, a hospital’s success is, in part, dependent upon the number and quality of physicians on the medical staffs, the admissions and referrals practices of the physicians, and the ability to maintain good relations with physicians. Many physicians are not employees of the hospitals at which they practice, and most physicians have admitting privileges at other hospitals. If our Trace hospital is unable to successfully maintain good relationships with physicians, admissions may decrease and operating performance could decline.

Changes in the laws and regulations regarding payments for hospice services and “room and board” provided to hospice patients residing in skilled nursing facilities could reduce our net patient service revenue and profitability.

For hospice patients receiving extended or nursing home care under certain state Medicaid programs who elect hospice care under Medicare or Medicaid, the state must pay, in addition to the applicable Medicare or Medicaid hospice per diem rate, an amount equal to at least 95% of the Medicaid per diem skilled nursing facility rate for “room and board” furnished to the patient by the skilled nursing facility. The reduction or elimination of Medicare payments for hospice patients residing in skilled nursing facilities could adversely affect the revenues of our skilled nursing facility.

Risks Relating to our Pharmacy Operations

The operations of our Pharmacy segment may be adversely affected by changes in government reimbursement regulations and payment levels.

For the years ended June 30, 2021 and June 30, 2020, respectively, the operations of our Pharmacy segment derived approximately 67% and 64%, respectively. of its net revenues from government payors, principally Medicare and Medicaid. The Deficit Reduction Act of 2005 exempted rural providers of home care related services from the competitive acquisition program to which urban providers are subject.

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We cannot assure you that the ASP reimbursement methodology will not be extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by the Pharmacy segment or that the Pharmacy segment will continue to be able to operate our Pharmacy segment profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which the Pharmacy segment operates, or may seek to operate, in particular or the Pharmacy segment would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.

The operations of our Pharmacy segment could be harmed by further changes in government purchasing methodologies and reimbursement rates for Medicare or Medicaid.

In addition to the impact of MMA, in order to deal with budget shortfalls, some states are attempting to create state administered prescription drug discount plans, to limit the number of prescriptions per person that are covered, to raise Medicaid co-pays and deductibles, and are proposing more restrictive formularies and reductions in pharmacy reimbursement rates. Any reductions in amounts reimbursable by other government programs for pharmacy services or changes in regulations governing such reimbursements could materially and adversely affect our Pharmacy segment business, financial condition and results of operations.

 

Louisiana, where our Pharmacy segment operates, has implemented a managed Medicaid program which is administered by outside contractors.  These managed Medicaid programs are designed to reduce the State’s administrative costs and the cost of the products and services provided to beneficiaries.  

The durable medical equipment service line of the Pharmacy segment may be adversely affected by further changes in government reimbursement regulations and payment levels, especially if the durable medical equipment service line becomes subject to additional competitive bidding procedures.

The Pharmacy segment is currently subject to the expanded provisions of the Medicare competitive bidding program which have had a negative impact on the prices we receive for durable medical equipment. The current provisions could be expanded or changed in the future. Any additional changes in government reimbursement or payment amounts could have a further adverse effect on our consolidated results of operations.

The operations of our Pharmacy segment depend on a continuous supply of key products. Any shortages of key products could adversely affect the business of the Pharmacy segment.

Many of the products distributed by the operations of our Pharmacy segment are manufactured with ingredients that are susceptible to supply shortages. In addition, the manufacturers of these products may not have adequate manufacturing capability to meet rising demand. If any products distributed by the Pharmacy segment are in short supply for long periods of time, this could result in a material adverse effect on our business and results of operations.

The operations of our Pharmacy segment are highly dependent on our relationship with and the stability of one key supplier, and the loss of such key supplier could adversely affect the business of the Pharmacy segment.

Any termination of, or adverse change in, our relationships with our key supplier, or the loss of supply of one of our key products for any other reason, could have a material adverse effect on the business of the Pharmacy segment and our consolidated results of operations. The largest supplier for the Pharmacy segment accounted for approximately 74% and 77% of the segment’s cost of goods sold in the fiscal years ended June 30, 2021 and June 30, 2020, respectively. In addition, the Pharmacy segment has few long-term contracts with its suppliers. Arrangements with most of its suppliers may be canceled by either party, without cause and on minimal notice; and many of these arrangements are not governed by written agreements.

The loss of one or more of larger institutional pharmacy customers could hurt our business by reducing the revenues and profitability of the operations of our Pharmacy segment.

As is customary in the institutional pharmacy industry, the institutional pharmacy service line of our Pharmacy segment generally does not have long-term contracts with its institutional pharmacy customers. Significant declines in the level of purchases by one or more of the larger institutional pharmacy customers could have a material adverse effect on the business of the Pharmacy segment and our consolidated results of operations.

The failure of the Pharmacy segment to maintain eligibility as a Medicare and Medicaid supplier could materially adversely affect its competitive position. Likewise, its failure to maintain and expand relationships with private payors, who can effectively determine the pharmacy source for their members, could materially adversely affect its competitive position.

 

29


 

Changes in average wholesale prices (“AWP”) could reduce our pricing and margins.

Many government payors, including Medicare and Medicaid, have paid, or continue to pay, the operations of our Pharmacy segment directly or indirectly at a rate based upon a drug’s AWP less a percentage factor. The Pharmacy segment also has contracted with some private payors to sell drugs at AWP or at AWP less a percentage factor. For most drugs, AWP is compiled and published by several private companies, including First DataBank, Inc. Several states have filed lawsuits against pharmaceutical manufacturers for allegedly inflating reported AWP for prescription drugs. In addition, class action lawsuits have been brought by consumers against pharmaceutical manufacturers alleging overstatement of AWP. We are not responsible for such calculations, reports or payments; however, there can be no assurance that the ability of our Pharmacy segment to negotiate discounts from drug manufacturers will not be materially adversely affected by such investigations or lawsuits.

The federal government also has entered into settlement agreements with several drug manufacturers relating to the calculation and reporting of AWP pursuant to which the drug manufacturers, among other things, have agreed to report new pricing information, the “average sales price”, to government healthcare programs. The average sales price is calculated differently than AWP and may be expected to have the effect of indirectly reducing reimbursement.

The Pharmacy segment faces numerous competitors and potential competitors in the market in which our Pharmacy segment operates, many of whom are significantly larger and who have significantly greater financial resources.

Large national companies operate in the existing market in which our Pharmacy segment operates. We cannot assure you that one or more of such companies or other healthcare companies will not seek to compete or intensify their level of competition in the areas in which we conduct or may seek to conduct one or more of the components of the operations of our Pharmacy segment.

The operations of our Pharmacy segment may be adversely affected by industry trends in managed care contracting and consolidation.

A growing number of health plans are contracting with a single provider of Pharmacy services. Likewise, manufacturers may not be eager to contract with regional providers of Pharmacy services. If the Pharmacy segment is unable to obtain managed care contracts in the areas in which we provide Pharmacy services or are unable to obtain Pharmacy products at reasonable costs or at all, the business operations of our Pharmacy segment could be adversely affected.

The Pharmacy segment market may grow slower than expected, which could adversely affect our revenues.

We cannot predict the rate of actual future growth in product availability and spending, the extent to which patient demand or spending for specialty drug services in rural or exurban areas will match national averages or whether government payors will provide reimbursement for new products under Medicare or Medicaid on a timely basis, at what rates, or at all. Adverse developments in any of these areas could have an adverse impact on the business operations of our Pharmacy segment.

The profitability of our Pharmacy segment can be adversely affected by a decrease in the introduction of new brand name and generic prescription drugs.

Sales and profit margins of the Pharmacy segment are materially affected by the introduction of new brand name and generic drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic alternatives typically result in relatively lower sales revenues, but higher gross profit margins. Accordingly, a decrease in the number of significant new brand name drugs or generics successfully introduced could adversely affect our business and results of operations.

Other Risks

Future developments could affect our ability to maintain adequate liquidity. Additionally, our ability to access alternative sources of capital is limited.

Historically, our available capital has been sufficient to meet our operating expenses, lease obligations, debt service requirements, and capital expenditures, and we have managed our liquidity such that our aggregate unrestricted cash at June 30, 2021, was $9,962, of which a substantial portion was received as government support funds relating to the COVID-19 pandemic and is subject to extensive terms and conditions. Future circumstances could require us to materially increase our revenues, materially reduce our expenses, or otherwise materially improve operating results, dispose of existing assets or obtain material new sources of capital in order to maintain adequate liquidity.

30


The Company is currently limited in its ability to raise capital, debt or equity, in the public or private markets on what it considers acceptable terms and due to the COVID-19 pandemic may be nonexistent. The Company and its subsidiaries currently must fund working capital needs from cash on hand, cash from operations or cash from the sale of additional assets, and we cannot assure you that we will be successful in improving our results of operations, reducing our costs, obtaining additional credit facilities or selling additional assets.

Forward-looking statements in this Annual Report may prove inaccurate.

This document contains forward-looking statements about SunLink that are not historical facts but, rather, are statements about future expectations. Forward-looking statements in this document are based on management’s current views and assumptions and may be influenced by factors that could cause actual results, performance or events to be materially different from those projected. These forward-looking statements are subject to numerous risks and uncertainties. Important factors, some of which are beyond the control of SunLink, could cause actual results, performance or events to differ materially from those in the forward-looking statements. These factors include those described above under “Risk Factors” and elsewhere in this Annual Report under “Forward-Looking Statements.”

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our principal properties as of the date of filing of this report are listed below:

 

Name or function

(licensed beds)

 

Location

City and State

 

Square

Footage

 

Date of Acquisition/

Lease Inception

 

Ownership

Type

Healthcare Services

 

 

 

 

 

 

 

 

 

 

 

Trace Regional Hospital (84)

 

Houston, MS

 

 

76,344

 

 

 

February 1, 2001

 

Owned

Trace Extended Care and Rehabilation Center  (66)

 

Houston, MS

 

 

32,700

 

 

 

February 1, 2001

 

Owned

Houston, MS land

 

Houston, MS

 

5.3 acres

 

(1)

 

February 1, 2001

 

Owned

Ellijay, GA land

 

Ellijay, GA

 

24.7 acres

 

(1)

 

October 1, 2019

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy Operations

 

 

 

 

 

 

 

 

 

 

 

Carmichael’s Cashway Pharmacy, Inc.

 

Crowley, LA

 

 

22,500

 

(2)

 

April 22, 2008

 

Leased

Carmichael’s Cashway Pharmacy, Inc.

 

Lafayette, LA

 

 

7,244

 

(3)

 

April 22, 2008

 

Leased

Carmichael’s Cashway Pharmacy, Inc.

 

Lake Charles, LA

 

 

7,808

 

(4)

 

April 22, 2008

 

Leased

Carmichael’s Cashway Pharmacy, Inc.

 

Lafayette, LA

 

 

545

 

(5)

 

March 31, 2015

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Offices

 

Atlanta, GA

 

 

1,121

 

(6)

 

June 1, 1998

 

Leased

 

(1)

This owned property is currently undeveloped.

(2)

Lease of approximately 20,100 square feet of store location, warehouse and office space. The lease expires in March 2026 and provides for a renewal of the lease for a five-year term. Includes an additional lease, commencing in June 2018, of approximately 2,400 square feet of off-site warehouse space. This lease expires in May 2022.

(3)

This lease is for a store location and warehouse space. It expires in October 2025.

(4)

This lease is for a store location and warehouse space and expires in December 2021.

(5)

This lease is for a store location in a medical office building and expires in August 2024.

(6)

This lease is for approximately 1,100 square feet of office space for corporate staff and SunLink Health Systems Technology. The lease expires in June 2025.

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Item 3.

Legal Proceedings

The Company and its subsidiaries are subject to various claims and litigation that arise from time to time in the ordinary course of business, including, among other things, tax, contract, workers compensation and medical malpractice claims and litigation. Medical malpractice and certain other claims are generally covered by malpractice, general liability or other insurance but are subject to provisions under which the Company retains a portion of the risk, which retention, particularly in the case of claims of medical malpractice, can be material. Based on current knowledge, the Company’s management does not believe that current pending claims and litigation will have a material adverse effect on the Company’s consolidated financial position or its liquidity.  However, in light of the uncertainties involved and indeterminate damages sought in some such claims and litigation, an adverse outcome could be material to our results of operations or cash flows in any reporting period.

Item 4.Not Applicable

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PART II

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

SunLink common shares are listed on the NYSE American exchange. SunLink’s ticker symbol is “SSY”. As of June 30, 2021, there were approximately 272 registered holders of SunLink common shares.

American Stock Transfer & Trust Company is the Transfer Agent and Registrar for our common shares. For all shareholder inquiries, call American Stock Transfer & Trust’s Shareholder Services Department at 1-888-937-5449.

Dividends

SunLink does not currently pay cash dividends. SunLink has historically retained its earnings for use in the operation and improvement of its business and for other corporate purposes. While the Company currently does not anticipate declaring or paying regular cash dividends in the foreseeable future, the board of directors has discussed returning capital to shareholders from funds derived from asset sales or otherwise. Any future determination to declare or pay cash dividends will be made by SunLink’s board of directors and will depend on SunLink’s financial condition, results of operations, business, prospects, capital requirements, credit agreements and such other matters as the board of directors may consider relevant at this time.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (all dollar amounts in thousands, except per share and revenue per equivalent admissions amounts)  

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 with U.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 ended June 30, 2021, 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.

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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 Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands, except per

share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

per share)

Receivables-net and Provision for Concession Adjustments

 

 

 

 

 

 

 

 

 

Receivables-net for our Healthcare Services segment primarily consists of amounts due from third-party payors and patients from providing healthcare services to healthcare facility patients. Receivables for our Pharmacy segment primarily consists of amounts due from third-party payors; institutions such as extended care and rehabilitation centers, nursing homes, home health, hospice, hospitals; Medicaid Part D program; and customers from the sale of pharmacy services and merchandise. Our ability to collect outstanding receivables is critical to our results of operations and cash flows. The primary uncertainty lies with accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients

 

Our provision for concession adjustments, included in our results of continuing operations for the years ended June 30, was as follows:

2021—$726; and

2020—$784

 

The largest component of concessions adjustments in our patient accounts receivable for our Healthcare Services and Pharmacy segments relates to accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients. In general, we attempt to collect deductibles, co-payments and self-pay accounts prior to the time of service for non-emergency care. If we do not collect these patient responsibility accounts prior to the delivery of care, the accounts are handled through our billing and collections processes.

We attempt to verify each patient’s insurance coverage as early as possible before a scheduled non-emergency admission or procedure, including with respect to eligibility, benefits and authorization/pre-certification requirements, in order to notify patients of the estimated amounts for which they will be responsible. 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.

 

A significant increase in our provision for doubtful accounts (as a percentage of revenues) would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and potentially our future access to capital.

If net revenues during fiscal year 2021 were changed by 1%, our 2021 after-tax income from continuing operations would change by approximately $407 or diluted earnings per share of $0.06.

This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate uncollectible patient accounts that are highly uncertain and requires a high degree of judgment. It is impacted by, among other things, changes in regional economic conditions, business office operations, payor mix and trends in private and federal or state governmental healthcare coverage.

 

34


 

 

Balance Sheet or Statement of Operations and Comprehensive

Earnings and Loss Caption/Nature of Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands, except per

share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

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.

 

 

 

35


 

 

Balance Sheet or Statement of Operations and Comprehensive

Earnings and Loss Caption/Nature of Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands, except per

share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

per share)

Revenue recognition / Net Patient Service Revenues

 

 

 

 

 

 

 

For our Healthcare Services segment, we recognize revenues in the period in which services are provided. For our Pharmacy segment, we recognize revenues in the period in which services are provided and at the time the customer takes possession of merchandise. Patient receivables primarily consist of amounts due from third-party payors and patients. Amounts we receive for treatment of patients covered by governmental programs, such as Medicare and Medicaid, and other third-party payors, such as HMOs, PPOs and other private insurers, are determined pursuant to contracts or established government rates and are generally less than our established billing rates. Accordingly, our gross revenues and patient receivables are reduced to net amounts receivable pursuant to such contracts or government payment rates through an allowance for contractual discounts. The sources of these revenues were as follows for the year ended June 30, 2021 (as a percentage of total revenues):

Medicare—44.7%;

Medicaid—25.9%; and

Commercial insurance and other sources—12.5%.

 

Revenues are recorded at estimated amounts due from patients, third- party payors, institutions, and others for healthcare and pharmacy services and goods provided net of contractual discounts pursuant to contract or government payment rates. Estimates for contractual allowances are calculated using computerized and manual processes depending on the type of payor involved. In our   hospital, the contractual allowances are calculated by a computerized system based on payment terms for each payor and certain manual estimates are used in calculating contractual allowances based on historical collections from payors that are not significant or have not entered into a contract with us. All contractual adjustments regardless of type of payor or method of calculation are reviewed and compared to actual experience on a periodic basis.

Accounts receivable primarily consist of amounts due from third party payors, institutions, and patients. Amounts we receive for the treatment of patients covered by HMOs, PPOs and other private 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.

 

 

 

36


 

 

Balance Sheet or Statement of Operations and Comprehensive

Earnings and Loss Caption/Nature of Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands, except per

share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

per share)

 

 

Governmental payors

 

Governmental payors

 

 

 

 

 

The majority of services performed on Medicare and Medicaid patients are reimbursed at predetermined reimbursement rates. The differences between the established billing rates (i.e., gross charges) and the predetermined reimbursement rates are recorded as contractual discounts and deducted from gross charges. Under this 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.

 

Because the laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, the estimates of contractual discounts we record could change by material amounts. Adjustments related to final settlements for revenues retrospectively increased (decreased) our revenues from continuing operations by the following amounts for the years ended June 30:

2021—$69 and

2020—$139.

 

 

 

 

 

Commercial Insurance

 

Commercial Insurance

 

 

 

 

 

For most managed care plans, contractual allowances estimated at the time of service are adjusted to actual contractual allowances as cash is received and claims are reconciled. We evaluate the following criteria in developing the estimated contractual allowance percentages: historical contractual allowance trends based on actual claims paid by managed care payors; review of contractual allowance information reflecting current contract terms; consideration and analysis of changes in payor mix reimbursement levels; and other issues that may impact contractual allowances.

 

If our overall estimated contractual discount percentage on all of our commercial revenues during 2021 were changed by 1%, our 2021 after-tax income from continuing operations would change by approximately $78. This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate the amount expected to be received and requires a high degree of judgment. It is impacted by changes in managed care contracts and other related factors.

A significant increase in our estimate of contractual discounts would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and future access to capital.

 

37


 

 

Balance Sheet or Statement of Operations and Comprehensive

Earnings and Loss Caption/Nature of Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands, except per

share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

per share)

Intangible assets and accounting for business combinations

 

 

 

 

 

 

 

Our intangible assets by business segment included in our consolidated balance sheets as of June 30 for the following years was as follows:

 

In accordance with Financial Accounting Standards Board (“FASB”) Accounting 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.

 

 

 

 

 

2021

 

2020

 

 

 

 

Pharmacy

 

 

 

 

 

 

 

 

 

 

Trade name

 

$

1,180

 

$

1,180

 

 

 

 

Customer relationships

 

 

1,089

 

 

1,089

 

 

 

 

Medicare License

 

 

623

 

 

623

 

 

 

 

 

 

 

2,892

 

 

2,892

 

 

 

 

Accumulated amortization

 

 

(1,665)

 

 

(1,638)

 

 

 

 

Total

 

$

1,227

 

$

1,254

 

 

 

 

 

38


 

 

Balance Sheet or Statement of Operations and Comprehensive

Earnings and Loss Caption/Nature of Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands,

except per share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

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 malpractice lawsuits and other claims as part of providing healthcare and pharmacy related services. To mitigate a portion of this risk, we have maintained insurance for individual malpractice claims exceeding a self-insured retention amount. Our self-insurance retention amount was $1,000 on individual malpractice claims for each contract year commencing March 1, 2011 through February 29, 2016 and was reduced to $750 from March 1, 2016 through March 31, 2021. A tail insurance policy has been purchased for claims occurring on or before March 31, 2021 which has a $750 per incident self-insured retention.  For claims occurring after March 31, 2021, claims made insurance policies have been purchased with $1,000 on individual malpractice claims for the contract year commencing April 1, 2021 through March 31, 2022.  

 

Each year, we obtain quotes from various malpractice insurers with 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.

 

The reserve for professional and general liability claims is based upon independent actuarial calculations, which consider historical claims data, demographic considerations, severity factors and other actuarial assumptions in the determination of reserve estimates.

The reserve for professional and general liability claims reflects the current estimate of all outstanding losses, including incurred but not reported losses, based upon actuarial calculations as of the balance sheet date. The loss estimates included in the actuarial calculations may change in the future based upon updated facts and circumstances.

 

We revise our reserve estimation process by obtaining independent actuarial calculations quarterly.

 

Actuarial calculations include a large number of variables that may significantly impact the estimate of ultimate losses recorded during a reporting period. In determining loss estimates, professional judgment is used by each actuary by selecting factors that are considered appropriate by the actuary for our specific circumstances. Changes in assumptions used by our independent actuary with respect to demographics and geography, Industry trends, development patterns and judgmental selection of other factors may impact our recorded reserve levels and our results of operations.

Changes in our initial estimates of professional and general liability claims are non-cash charges and accordingly, there would be no material impact currently on our liquidity or capital resources.

 

39


 

 

 

 

 

 

 

Balance Sheet or Statement of Operations and Comprehensive

Earnings and Loss Caption/Nature of Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands, except

per share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

per share)

The reserve for professional and general liability claims included in our consolidated balance sheets as of June 30 was as follows:

2021—$37 and

2020—$123

The total increases (decreases) for professional and general liability coverage, included in our consolidated results of operations for the years ended June 30, was as follows:

2021—$211; and

2020—$(338).

  

Our estimated reserve for professional and general liability claims will be significantly affected if current and future claims differ from historical trends. While we monitor reported claims closely and consider potential outcomes as estimated by our independent 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.

  

 

 

40


 

 

Balance Sheet or Statement of Operations and Comprehensive

Earnings and Loss Caption/Nature of Critical Estimate Item

(dollar amounts in thousands, except per share)

 

Assumption / Approach Used

(dollar amounts in thousands, except

per share)

 

Sensitivity Analysis

(dollar amounts in thousands, except

per share)

Accounting for income taxes

  

 

  

 

 

 

 

 

 

Deferred tax assets generally represent items that will result in a tax deduction in future years for which we have already recorded the tax benefit in our Statement of Operations and Comprehensive Earnings and Loss. We assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not probable, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance, we must include an expense as part of the income tax provision in our results of operations. Our net deferred tax asset balance (net of valuation allowance) in our consolidated balance sheets as of June 30 for the following years was as follows:

2021—$0; and

2020—$0.

Our valuation allowances for deferred tax assets in our consolidated balance sheets as of June 30 for the following years were as follows:

2021—$6,700; and

2020—$8,389.

In addition, significant judgment is required in determining and assessing the impact of certain tax-related contingencies. We establish accruals when, despite our belief that our tax return positions are fully supportable, it is probable that we have incurred a loss related to tax contingencies and the loss or range of loss can be reasonably estimated.

We adjust the accruals related to tax contingencies as part of our provision for income taxes in our results of operations based upon changing facts and circumstances, such as the progress of a tax audit, development of industry related examination issues, as well as legislative, regulatory or judicial developments. A number of years may elapse before a particular matter, for which we have established an accrual, is audited and resolved.

  

The first step in determining the deferred tax asset valuation allowance is identifying reporting jurisdictions where we have a history of tax and operating losses or are projected to have losses in future periods as a result of changes in operational performance. We then determine if a valuation allowance should be established against the deferred tax assets for that reporting jurisdiction.

 

The second step is to determine the amount of the valuation allowance. We will generally establish a valuation allowance equal to the net deferred tax asset (deferred tax assets less deferred tax liabilities) related to the jurisdiction identified in the first step of the analysis. In certain cases, we may not reduce the valuation allowance by the amount of the deferred tax liabilities depending on the nature and timing of future taxable income attributable to deferred tax liabilities.

 

In assessing tax contingencies, we identify tax issues that we believe may be challenged upon examination by the taxing authorities. We also assess the likelihood of sustaining tax benefits associated with tax 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.

  

Our deferred tax assets were $6,700 at June 30, 2021, excluding the impact of valuation allowances. At June 30, 2021, the Company evaluated the need for a valuation allowance 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 total valuation allowance of $6,700 against the deferred tax asset so that the net tax deferred asset was $0 at June 30, 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 we judged directly related to our current financial performance as compared to less current evidence and future plans.

The IRS may propose adjustments for items we have failed to identify as tax contingencies. If the IRS were to propose and sustain assessments equal to 10% of our taxable income for 2020, we would incur approximately $0 of additional tax expense for 2021 plus applicable penalties and interest.

 

41


 

Financial Summary

The results of continuing operations shown in the historical summary below are for our two business segments, Healthcare Services and Pharmacy.

 

 

 

2021

 

 

2020

 

Net Revenues—Healthcare Services

 

$

13,613

 

 

$

16,243

 

Net Revenues—Pharmacy

 

 

27,072

 

 

 

31,570

 

Total Net Revenues

 

 

40,685

 

 

 

47,813

 

Costs and expenses

 

 

(38,816

)

 

 

(48,142

)

Operating profit (loss)

 

 

1,869

 

 

 

(329

)

Federal stimulus - Pandemic relief funds

 

 

4,880

 

 

 

54

 

Forgiveness of PPP loans and accrued interest

 

 

264

 

 

 

0

 

Interest Expense

 

 

(28

)

 

 

(29

)

Loss on extinguishment of debt—net

 

 

0

 

 

 

(178

)

Gain on sale of assets

 

 

13

 

 

 

192

 

Earnings (loss) from continuing operations before income taxes

 

$

6,998

 

 

$

(290

)

 

 

 

 

 

 

 

 

 

Healthcare Services segment:

 

 

 

 

 

 

 

 

Hospital and Extended Care and Rehabilitation Center Admissions

 

 

281

 

 

 

393

 

 

 

 

 

 

 

 

 

 

Hospital and Extended Care and Rehabilitation Center Patient Days

 

 

19,577

 

 

 

25,946

 

 

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 June 30, 2021 and 2020:

 

 

 

2021

 

 

2020

 

Medicare

 

$

18,194

 

 

$

20,013

 

Medicaid

 

 

10,522

 

 

 

13,956

 

Retail and Institutional Pharmacy

 

 

6,090

 

 

 

6,465

 

Managed Care & Other Insurance

 

 

5,094

 

 

 

6,742

 

Self-pay

 

 

510

 

 

 

498

 

Rent

 

 

0

 

 

 

16

 

Other

 

 

275

 

 

 

123

 

Total Net Revenues

 

$

40,685

 

 

$

47,813

 

 

Healthcare Services net revenues in the current year are composed of revenues from one hospital, one extended care and rehabilitation center and a subsidiary which provides information technology services to outside customers and SunLink subsidiaries. Healthcare Services net revenues decreased $2,630, or 16.2% in the year ended June 30, 2021 compared to the year ended June 30, 2020. The decrease in net revenues for fiscal 2021 resulted from primarily from reduced patient demand as a result of the COVID-19 pandemic. Hospital days decreased 21.9%, extended care and rehabilitation center patient days decreased 25.0% and clinic visits decreased 25.5% in the fiscal year ended June 30, 2021 compared to the prior year. Settlements of prior year Medicare and Medicaid cost reports contributed net revenues from continuing operations of $69 for the year ended June 30, 2021 and $139 for the year ended June 30, 2020.

Pharmacy Segment net revenues for the year ended June 30, 2021 of $27,072 decreased 14.2% from the prior year. 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.  Total scripts filled decreased 9.6% and Durable Medical Equipment sales orders decreased 7.9% for the year ended June 30, 2021 from the prior year. 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.

42


Costs and expenses, including depreciation and amortization, were $38,816 and $48,142 for the fiscal years ended June 30, 2021 and 2020, respectively. Costs and expenses as a percentage of net revenues were:

 

 

 

2021

 

 

2020

 

Cost of goods sold

 

 

38.4

%

 

 

39.8

%

Salaries, wages and benefits

 

 

33.9

%

 

 

40.7

%

Supplies

 

 

2.4

%

 

 

2.5

%

Purchased services

 

 

6.1

%

 

 

6.2

%

Other operating expenses

 

 

9.9

%

 

 

7.3

%

Rent and lease expense

 

 

1.4

%

 

 

1.3

%

Depreciation and amortization expense

 

 

3.4

%

 

 

3.0

%

 

 

 

 

 

 

 

 

 

 

Cost of goods sold as a percent of net revenues decreased 1.4% in the fiscal year ended June 30, 2021 compared to the prior fiscal year due to decreased sales of higher cost intravenous products. Salaries, wages and benefits expense as a percent of net revenues decreased 6.8% this year compared to the prior fiscal year due to the recognition of CARES Act Employer Retention Credits which the company qualified for when the program was amended effective January 1, 2021. Other operating expenses increased 2.6% due to increased professional liability and other insurance expenses.

 

Operating Profit (Loss)

Operating profit was $1,871 for the year ended June 30, 2021 compared to an operating loss of $329 for the year ended June 30, 2020. The operating profit in the year ended June 30, 2021 compared to the prior fiscal year resulted from the recognition of CARES Act Employer Retention Credits for which the company qualified when the program was amended effective January 1, 2021.  

 

Other Income - Federal stimulus – Pandemic relief funds

As part of CARES, two subsidiaries received total payments of $5,370 under the Provider 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 grants.  During the fiscal year ended June 30, 2021, $4,880 of these funds were recognized as Other Income for reimbursement of Lost Revenues and for COVID-19 related expenses compared to $54 for the fiscal year ended June 30, 2020.

Forgiveness of PPP loan and accrued interest

During the quarter ended June 30, 2021, $261 of our PPP loans and related $3 of accrued interest were forgiven by the SBA and $264 was recorded as income relating to the PPP loan forgiveness in the quarter ended June 30, 2021. In July and August 2021, we received notification that the remaining outstanding $2,972 of PPP loans and related $38 of accrued interest was forgiven by the SBA.  During the quarter ended September 30, 2021, we will record $3,010 of income for PPP loan forgiveness.

Interest Expense-net

Interest expense, net was $28 and $29 for the years ended June 30, 2021 and 2020, respectively, and consisted primarily of interest accrued on PPP loans in the year ended June 30, 2021.

Loss on extinguishment of debt

During the year ended June 30, 2020, the Company repaid the outstanding balance of the Trace RDA Loan, which was scheduled to be fully repaid in July 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 ended June 30, 2020.

 

Gain on Sale of Assets

 

On December 20, 2019, the Company sold a medical office building and approximately 4 acres of land in Clanton, AL. After expenses, the Company received net proceeds from the sale of $204, which was retained for working capital and general corporate

43


purposes. The pre-tax gain on the sale of property was $86 and is included in the Company’s results for the fiscal year ended June 30, 2020.

On September 9, 2019, the Company sold approximately 11.4 acres of undeveloped land in Fulton, 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 ended June 30, 2020.

Income Taxes

 

We recorded income tax expense of $63 ($63 state tax expense) for the year ended June 30, 2021 compared to an income tax expense of $296 ($296 state tax expense) for the year ended June 30, 2020.

 

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 published IRS guidance as of the preparation of the June 30, 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. ERC are includable in tax income in the Company’s tax returns in the fiscal year in which the payroll expenses for which the quarterly credits offset are deductible. ERC results in qualified wages being disallowed as a deduction for the portion of wages paid equal to the sum of the payroll tax credit taken in the associated quarter. For amounts received and forgiven under PPP Loans, due to the enactment of the Consolidated Appropriations Act, 2021, on December 27, 2020,  Congress specifically allows the deduction of any expenses associated with forgiven PPP loan proceeds.  It is the Company’s assumption at June 30, 2021 that all PPP Loan associated expenses will be deductible for income tax and the book forgiveness income will not be taxable. The Company has sufficient federal net operating losses for the period to cover the resulting provisional June 30, 2021 taxable income, The year ended June 30, 2021 current tax expense represents the state income tax accrued resulted from tax income resulting from ERC accrued and associated disallowed wages and PRF received during the period.

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.

At June 30, 2021, consistent with the above process, we evaluated the need for a valuation allowance 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 $6,700 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability at June 20, 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 performance.

The principal negative evidence that led us to determine at June 30, 2021 that all the deferred tax assets should have full valuation allowances was 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 $15,631.   

For Federal income tax purposes, at June 30, 2021, the Company had approximately $15,631 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, 2018 are no longer subject to potential federal and state income tax examination.

Discontinued Operations

44


Loss from discontinued operations net of income tax was $47 for the year ended June 30, 2021, and loss from discontinued operations net of income taxes were $554 for the year ended June 30, 2020. 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, 2021 and 2020.

Discontinued Operations—Summary Statement of Earnings Information

 

 

 

2021

 

 

2020

 

Net Revenues:

 

 

 

 

 

 

 

 

Sold Hospitals

 

$

191

 

 

$

37

 

 

 

$

191

 

 

$

37

 

Earnings (Loss)  before Income Taxes:

 

 

 

 

 

 

 

 

Sold Hospitals

 

$

33

 

 

$

(418

)

Life sciences and engineering

 

 

(80

)

 

 

(136

)

Earnings (loss) before income taxes

 

 

(47

)

 

 

(554

)

Income tax expense

 

 

0

 

 

 

0

 

Earnings (Loss) from discontinued operations

 

$

(47

)

 

$

(554

)

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss) Net earnings for the year ended June 30, 2021 was $6,890 ($0.99 per fully diluted share) compared to the net loss for the year ended June 30, 2020 of $1,140 (a loss of $0.16 per fully diluted share).

Liquidity and Capital Resources

Overview

Our primary source of liquidity is unrestricted cash on hand, which was $9,962 at June 30, 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. 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, and due to the COVID-19 pandemic and related factors, may be non-existent.

CARES Act Provider Relief Funds— The CARES Act was enacted by the U.S. government on March 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 $8,304 under the CARES Act programs consisting of $5,370 in general and targeted PRF and $3,234 of PPP loans. During the first two calendar quarters of 2021, the Company qualified for, and we are applying for ERC through amending our quarterly payroll tax filing for the applicable quarters.

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.

45


Contractual Obligations, Commitments and Contingencies

Contractual obligations related to long-term debt, non-cancelable operating leases and interest on outstanding debt from continuing operations at June 30, 2021 is shown in the following table. The interest on variable interest debt is calculated at the interest rate in effect at June 30, 2021.

 

Payments

due in:

 

 

 

Long-Term

Debt

 

 

Interest on

Long-Term

Debt

 

1 year

 

 

 

$

3,009

 

 

$

43

 

2 years

 

 

 

 

36

 

 

 

5

 

3 years

 

 

 

 

16

 

 

 

1

 

4 years

 

 

 

 

0

 

 

 

0

 

5 years

 

 

 

 

0

 

 

 

0

 

More than 5 years

 

 

 

 

0

 

 

 

0

 

 

 

 

 

$

3,061

 

 

$

49

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term Debt —At June 30, 2021, we had outstanding long-term debt of $3,061, which was composed of PPP Loans of $2,972 (which the Company has notified has been forgiven under the terms of program) and capital lease debt of $89.

Commitments for capital expenditures — At June 30, 2021, the Company has approximately $1,100 of commitments for future capital expenditures for our Trace hospital under its Trace Forward Capital Plan which was announced in March 2021. This Plan expands, upgrades and improves the physical plant, patient care, ancillary services and support areas of the Trace hospital.

 

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 $182 and $251 to the law firm in the fiscal years ended June 30, 2021 and 2020, respectively. Included in the Company’s consolidated balance sheets at June 30, 2020 and 2019 is $21 and $6 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.

46


Item 8.

Financial Statements and Supplementary Data.

Index to Financial Statements and Supplementary Data

 

 

 

Page

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-1

Consolidated Balance Sheets—as of June 30, 2021 and 2020

 

F-3

Consolidated Statements of Operations and Comprehensive Earnings and Loss—for each of the two years ended June 30, 2021 and 2020

 

F-4

Consolidated Statements of Shareholders’ Equity—for each of the two years ended June 30, 2021 and 2020

 

F-5

Consolidated Statements of Cash Flows—for each of the two years ended June 30, 2021 and 2020

 

F-6

Notes to Consolidated Financial Statements—as of and for the two years ended June 30, 2021 and 2020

 

F-7

 

Item 9A.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act ”), as of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Under the direction of our principal executive officer and principal financial officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of June 30, 2021.

Disclosure controls and procedures and other procedures are designed to ensure that information required to be disclosed in our reports or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on an evaluation of the effectiveness of disclosure controls and procedures performed in connection with this Annual Report on Form 10-K, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.

Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all information presented in this Annual Report on Form 10-K. The consolidated financial statements contained herein were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the Company’s independent registered public accounting firm and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accounting firm. The independent registered public accounting firm has free access to the Audit Committee.

47


Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our assessment we concluded that, as of June 30, 2021, the Company’s internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

During the last fiscal quarter ended June 30, 2021, there has been no significant change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.

Securities Authorized for Issuance under Equity Compensation Plans

Incorporated by reference from the registrant’s definitive Proxy Statement to be filed under Regulation 14A in connection with the Annual Meeting of Shareholders of SunLink Health Systems, Inc. scheduled to be held on November 10, 2021.

48


PART IV

Item 15.

Exhibits, Financial Statement Schedules.

(a) (1) Financial Statements

The following consolidated financial statements of the Company and its subsidiaries are set forth in Item 8 of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets—June 30, 2021 and 2020.

Consolidated Statements of Operations and Comprehensive Earnings and Loss—For the Years Ended June 30, 2021 and 2020.

Consolidated Statements of Shareholders’ Equity—For the Years Ended June 30, 2021 and 2020.

Consolidated Statements of Cash Flows—For the Years Ended June 30, 2021 and 2020.

Notes to Consolidated Financial Statements—For the Years Ended June 30, 2021 and 2020.

(a) (2) Financial Statement Schedules

 

 

 

 

Report of Independent Auditor on Supplemental Information

 

At page 54 of this Report

Schedule II Valuation and Qualifying Accounts

 

At page 55 of this Report

The information required to be submitted in Schedules I, III, IV and V for SunLink Health Systems, Inc. and its consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or not required under Regulation S-X and, therefore, has been omitted.

(a) (3) See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit is identified below by an asterisk.

(b) Exhibits

The following exhibits are filed with this Form 10-K or incorporated herein by reference from the document set forth next to the exhibit in the list below. Exhibit numbers refer to Item 601 of Regulation S-K:

 

    3.(i)

 

Articles of Incorporation of SunLink Health Systems, Inc. (f/k/a KRUG International Corp.) and all amendments thereto (incorporated by reference to Exhibit 3(i) of the Company’s Report on Form 10-Q for the quarter ended March 31, 2021). (Commission File No. 21922250)

 

 

 

    3.(ii)

 

Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180)

 

 

 

    4.(i)(A)

 

Shareholder Rights Agreement dated as of February 10, 2014, between SunLink Health Systems, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference from Exhibit 4.1 of the Company’s Report on Form 8-K filed February 27, 2014). (Commission File No. 14647348)

 

 

 

    4.(i)(B)

 

Tax Benefits Preservation Rights Plan between SunLink Health Systems, Inc. and American Stock Transfer & Trust, LLC, as Rights Agent dated as of September 29, 2016. (incorporated by reference from Exhibit 4.2 of the Company’s Report on Form 8-K filed September 29, 2016). (Commission File No. 161910046)

 

 

 

    4.(i)(C)

 

Definition of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. (incorporated by reference from Exhibit 4.3 of the Company’s Report on Form 10-K for the fiscal year ended June 30, 2019). (Commission File No. 191122160)

 

 

 

  10.1*

 

Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). (Commission File No. 051197210)

 

 

 

  10.2*

 

Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K filed December 23, 2005). (Commission File No. 051285094)

 

 

 

  10.3*

 

2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed September 20, 2006). (Commission File No. 061100389)

49


 

 

 

  10.5*

 

Employment letter dated September 23, 2010 with an effective date of September 30, 2010, by and between SunLink ScriptsRx, LLC and Byron D. Finn (incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No.  111108066)

 

 

 

  10.6*

 

2011 Director Stock Option Plan (incorporated by reference from Appendix A to the Company’s Schedule 14A Definitive Proxy Statement filed September 29, 2011) (Commission File No. 111115265).

 

 

 

  10.7 

 

U. S. Small Business Administration Note between Carmichael’s Cashway Pharmacy, Inc., and the U. S. Small Business Administration dated May 2, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.8

 

U. S. Small Business Administration Note between SunLink ScriptsRX, LLC, and the U. S. Small Business Administration dated May 1, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.9

 

U. S. Small Business Administration Note between SunLink Health Systems, Inc. and the U. S. Small Business Administration dated April 15, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.10

 

U. S. Small Business Administration Note between Crown Healthcare Investments, LLC, and the U. S. Small Business Administration dated April 13, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.11

 

U. S. Small Business Administration Note between SunLink Health Systems Technology, Inc. and the U. S. Small Business Administration dated April 13, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.12

 

U. S. Small Business Administration Note between Southern Health Corporation of Houston, Inc. and the U. S. Small Business Administration dated April 13, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

10.13*

 

Employment letter by and between SunLink Health Systems, Inc. and Sheila G. Brockman dated October 1, 2020 (incorporated by reference to the Company’s Report on Form 10-Q for the quarter ended September 30, 2020). (Commission File No. 201310866)

 

 

 

   21.1^

 

List of Subsidiaries

 

 

 

   23.1^

 

Consent of Cherry Bekaert LLP

 

 

 

   31.1^

 

Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

 

   31.2^

 

Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

 

   32.1^

 

Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

 

 

 

   32.2^

 

Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

 

 

 

  101

 

The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets as of June 30, 2021 and June 30, 2020, (ii) Consolidated Statements of Operations and Comprehensive Earnings and Loss for the fiscal years ended June 30, 2021 and 2020, (iii) Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 30, 2021 and 2020 (iv) Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2021 and 2020 and (v) Notes to Consolidated Financial Statements.

 

*

Management contract or compensatory plan or arrangement.

^

Filed herewith.

 

 

50


 

INDEX TO EXHIBITS

 

    3.(i)

 

Articles of Incorporation of SunLink Health Systems, Inc. (f/k/a KRUG International Corp.) and all amendments thereto (incorporated by reference to Exhibit 3(i) of the Company’s Report on Form 10-Q for the quarter ended March 31, 2021). (Commission File No. 21922250)

 

 

 

    3.(ii)

 

Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180)

 

 

 

    4.(a)(i)

 

Shareholder Rights Agreement dated as of February 10, 2014, between SunLink Health Systems, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference from Exhibit 4.1 of the Company’s Report on Form 8-K filed February 27, 2014). (Commission File No. 14647348)

 

 

 

    4.(a)(ii)

 

Tax Benefits Preservation Rights Plan between SunLink Health Systems, Inc. and American Stock Transfer & Trust, LLC, as Rights Agent dated as of September 29, 2016. (incorporated by reference from Exhibit 4.2 of the Company’s Report on Form 8-K filed September 29, 2016). (Commission File  No. 161910046)

 

 

 

    4.(a)(iii)

 

Definition of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. (incorporated by reference from Exhibit 4.3 of the Company’s Report on Form 10-K for the fiscal year ended June 30, 2019). (Commission File No. 191122160)

 

 

 

  10.1*

 

Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of the Company’s Quarterly Report Form 10-Q for the quarter ended September 30, 2005). (Commission File No. 051197210)

 

 

 

  10.2*

 

Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K filed December 23, 2005). (Commission File No. 051285094)

 

 

 

  10.3*

 

2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed September 20, 2006). (Commission File No. 061100389)

 

 

 

  10.5*

 

Employment letter dated September 23, 2010 with an effective date of September  30, 2010, by and between SunLink ScriptsRx, LLC and Byron D. Finn (incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No.  111108066)

 

 

 

  10.6*

 

2011 Director Stock Option Plan (incorporated by reference from Appendix A to the Company’s Schedule 14A Definitive Proxy Statement filed September 29, 2011) (Commission File No. 111115265).

 

 

 

  10.7

 

U. S. Small Business Administration Note between Carmichael’s Cashway Pharmacy, Inc., and the U. S. Small Business Administration dated May 2, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.8

 

U. S. Small Business Administration Note between SunLink ScriptsRX, LLC, and the U. S. Small Business Administration dated May 1, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.9

 

U. S. Small Business Administration Note between SunLink Health Systems, Inc. and the U. S. Small Business Administration dated April 15, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.10

 

U. S. Small Business Administration Note between Crown Healthcare Investments, LLC, and the U. S. Small Business Administration dated April 13, 2020. ^(incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.11

 

U. S. Small Business Administration Note between SunLink Health Systems Technology, Inc. and the U. S. Small Business Administration dated April 13, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

  10.12

 

U. S. Small Business Administration Note between Southern Health Corporation of Houston, Inc. and the U. S. Small Business Administration dated April 13, 2020. (incorporated by reference to the Company’s Report on Form 10-K for the year ended June 30, 2020). (Commission File No. 201207119)

 

 

 

10.13*

 

Employment letter by and between SunLink Health Systems, Inc. and Sheila G. Brockman dated October 1, 2020 (incorporated by reference to the Company’s Report on Form 10-Q for the quarter ended September 30, 2020). (Commission File No. 201310866)

51


 

 

 

   21.1 ^

 

List of Subsidiaries

 

 

 

   23.1^

 

Consent of Cherry Bekaert LLP

 

 

 

   31.1^

 

Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

 

   31.2^

 

Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

 

   32.1^

 

Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

 

 

 

   32.2^

 

Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

 

 

 

101

 

The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets as of June 30, 2021 and June 30, 2020, (ii) Consolidated Statements of Operations and Comprehensive Earnings and Loss for the fiscal years ended June 30, 2021 and 2020, (iii) Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 30, 2021 and 2020 (iv) Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2021 and 2020 and (v) Notes to Consolidated Financial Statements.

 

*

Management contract or compensatory plan or arrangement.

^

Filed herewith.

 

52


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SunLink Health Systems, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 27th day of September, 2021.

 

 

 

 

SUNLINK HEALTH SYSTEMS, INC.

 

 

By:

 

/s/ Robert M. Thornton, Jr.

 

 

Robert M. Thornton, Jr.

Chairman and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of SunLink Health Systems, Inc. and in the capacities and on the dates indicated:

 

Name

 

Title

 

Date

 

 

 

 

 

/s/ Robert M. Thornton, Jr.

 

Director, Chairman, President and

Chief Executive Officer

(principal executive officer)

 

September 27, 2021

Robert M. Thornton, Jr.

 

 

 

 

 

 

 

/s/ Mark J. Stockslager

 

Chief Financial Officer and

Principal Accounting Officer

(principal accounting officer)

 

September 27, 2021

Mark J. Stockslager

 

 

 

 

 

 

 

/s/ Steven J. Baileys, D.D.S.

 

Director

 

September 27, 2021

Steven J. Baileys, D.D.S.

 

 

 

 

 

 

 

/s/ Gene E. Burleson

 

Director

 

September 27, 2021

Gene E. Burleson

 

 

 

 

 

 

 

/s/ C. Michael Ford

 

Director

 

September 27, 2021

C. Michael Ford

 

 

 

 

 

 

 

/s/ Howard E. Turner

 

Director

 

September 27, 2021

 

 


53


 

Report of Independent Auditor on Supplemental Information

 

To the Board of Directors and Shareholders
SunLink Health Systems, Inc.

 

We have audited the consolidated financial statements of SunLink Health Systems, Inc. (the “Company”) as of
June 30, 2021 and 2020 and for each of the years in the two-year period ended June 30, 2021, and have issued our report, which expressed an unqualified opinion on those consolidated financial statements, thereon dated September 28, 2021. The supplemental information contained in Schedule II Valuation and Qualifying Accounts has been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with accounting principles generally accepted in the United States of America. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.

 

 

/s/ Cherry Bekaert LLP

 

Atlanta, Georgia

September 27, 2021

 

 

 

54


 

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

(amounts in thousands)

 

Deferred

Income

Tax Asset

Valuation

Allowance

 

Balance at

Beginning

Of Year

 

 

Charged to

Cost and

Expenses/

(Benefit)

 

 

Currency

Translation/

Acquisition/

(Disposition)

 

 

Deductions

from

Reserves

 

 

Balance at

End of

Year

 

Year Ended June 30, 2021

 

$

8,389

 

 

$

0

 

 

$

0

 

 

$

(1,689

)

 

$

6,700

 

Year Ended June 30, 2020

 

$

8,625

 

 

$

0

 

 

$

0

 

 

$

(236

)

 

$

8,389

 

 

 

 

 

55


 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Shareholders
SunLink Health Systems, Inc.

 

 

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of SunLink Health Systems, Inc. (the “Company”) as of June 30, 2021, and 2020, and the related consolidated statements of operations and comprehensive earnings and loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended
June 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


F-1


 

 

 

 

Revenue from Contracts with Customers

 

Description of Matter

 

The Company had $40.69 million in revenues for the year ended June 30, 2021. As disclosed in Note 4 to the consolidated financial statements, the Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. Revenues are based upon billed amounts to patients and contractually agreed-upon amounts or rates with third-party payors, including governmental insurance plans and private insurers.

 

Revenues are recorded net of contractual allowances and implicit price concessions for insured and self-pay patients. Management estimates the contractual allowances based upon the specified terms in the related contractual agreements or as mandated under government payer programs, which are subject to change based on changes in federal laws and regulations. Implicit price concessions are based upon management’s assessment of historical write-offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators.

 

Auditing management’s estimate of contractual allowances and implicit price concessions was complex and judgmental due to the significant data inputs and subjective assumptions utilized in determining related amounts.

 

How We Addressed the Matter in Our Audit

 

Based on our knowledge of the Company, we determined the nature and extent of procedures to be performed over revenue, including the determination of the revenue streams over which those procedures were performed. Our audit procedures included the following for each revenue stream where procedures were performed:

Obtained an understanding of the internal controls and processes in place over the Company’s revenue recognition.

Assessed the recorded revenue and accounts receivable by selecting a sample of transactions, analyzed the related third-party payer information, tested management’s identification of distinct performance obligations, and compared the amounts recognized for consistency with underlying documentation, including cash collections.

Performed predictive analytical estimates of accounts receivable at year-end and revenue for the year utilizing underlying operating metrics and compared to reported balances.

Performed substantive analytical procedures over contractual allowances and allowances for doubtful accounts receivable.

 

We have served as the Company’s auditor since 2004.

 

/s/ Cherry Bekaert LLP

 

Atlanta, Georgia

September 27, 2021

F-2


SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2021 AND 2020

(All Amounts in thousands)

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,962

 

 

$

11,184

 

Receivables

 

 

4,189

 

 

 

4,315

 

Inventory

 

 

1,890

 

 

 

1,866

 

Employee retention credits receivable

 

 

3,586

 

 

 

0

 

Prepaid expenses and other assets

 

 

2,314

 

 

 

2,558

 

Total current assets

 

 

21,941

 

 

 

19,923

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

 

Land

 

 

582

 

 

 

582

 

Buildings and improvements

 

 

6,361

 

 

 

5,363

 

Equipment and fixtures

 

 

13,937

 

 

 

13,804

 

 

 

 

20,880

 

 

 

19,749

 

Less accumulated depreciation

 

 

14,326

 

 

 

14,425

 

Property, plant and equipment—net

 

 

6,554

 

 

 

5,324

 

NONCURRENT ASSETS:

 

 

 

 

 

 

 

 

Intangible assets—net

 

 

1,227

 

 

 

1,254

 

Right of use assets

 

 

1,251

 

 

 

970

 

Other noncurrent assets

 

 

591

 

 

 

500

 

Total noncurrent assets

 

 

3,069

 

 

 

2,724

 

TOTAL ASSETS

 

$

31,564

 

 

$

27,971

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,096

 

 

$

872

 

Current maturities of long-term debt, net of debt issuance costs

 

 

3,009

 

 

 

1,401

 

Accrued payroll and related taxes

 

 

1,866

 

 

 

1,969

 

Accrued sales tax payable

 

 

1,966

 

 

 

1,411

 

Unearned CARES Act funds

 

 

437

 

 

 

4,532

 

Current operating lease liabilities

 

 

403

 

 

 

365

 

Other accrued expenses

 

 

888

 

 

 

866

 

Total current liabilities

 

 

9,665

 

 

 

11,416

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt

 

 

52

 

 

 

1,957

 

Noncurrent liability for professional liability risks

 

 

31

 

 

 

104

 

Long-term operating lease liabilities

 

 

875

 

 

 

607

 

Other noncurrent liabilities

 

 

131

 

 

 

144

 

Total long-term liabilities

 

 

1,089

 

 

 

2,812

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred Shares, authorized and unissued, 2,000 shares

 

 

0

 

 

 

0

 

Common Shares, no par value; authorized, 12,000 shares; issued

   and outstanding, 6,924 shares at June 30, 2021 and

   6,899 shares at June 30, 2020

 

 

3,463

 

 

 

3,450

 

Additional paid-in capital

 

 

10,700

 

 

 

10,713

 

Retained earnings (loss)

 

 

6,809

 

 

 

(81

)

Accumulated other comprehensive loss

 

 

(162

)

 

 

(339

)

Total Shareholders’ Equity

 

 

20,810

 

 

 

13,743

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

31,564

 

 

$

27,971

 

 

See notes to consolidated financial statements.

F-3


SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE EARNINGS AND LOSS

FOR THE YEARS ENDED JUNE 30, 2021 and 2020

(All amounts in thousands, except per share amounts)

 

 

 

2021

 

 

2020

 

Net Revenues

 

$

40,685

 

 

$

47,813

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

15,614

 

 

 

19,023

 

Salaries, wages and benefits

 

 

13,797

 

 

 

19,563

 

Supplies

 

 

989

 

 

 

1,215

 

Purchased services

 

 

2,471

 

 

 

2,924

 

Other operating expenses

 

 

4,029

 

 

 

3,366

 

Rent and lease expense

 

 

553

 

 

 

601

 

Depreciation and amortization

 

 

1,361

 

 

 

1,450

 

                Operating profit (loss)

 

 

1,871

 

 

 

(329

)

Other income (expense):

 

 

 

 

 

 

 

 

Federal stimulus - Pandemic relief funds

 

 

4,880

 

 

 

54

 

Forgiveness of PPP loans and accrued interest

 

 

264

 

 

 

0

 

Interest income (expense), net

 

 

(28

)

 

 

(29

)

Loss on extinguishment of debt—net

 

 

0

 

 

 

(178

)

Gain on sale of assets—net

 

 

13

 

 

 

192

 

Earnings (loss) from continuing operations before income taxes

 

 

7,000

 

 

 

(290

)

Income tax expense (benefit)

 

 

63

 

 

 

296

 

Earnings (Loss) from continuing operations

 

 

6,937

 

 

 

(586

)

Loss from discontinued operations, net of income taxes

 

 

(47

)

 

 

(554

)

Net earnings (loss)

 

 

6,890

 

 

 

(1,140

)

Other comprehensive income (loss)

 

 

177

 

 

 

(86

)

Comprehensive earnings (loss)

 

$

7,067

 

 

$

(1,226

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Continuing operations:

 

 

 

 

 

 

 

 

Basic

 

$

1.00

 

 

$

(0.08

)

Diluted

 

$

0.99

 

 

$

(0.08

)

Discontinued operations:

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

(0.08

)

Diluted

 

$

(0.01

)

 

$

(0.08

)

Net earnings (loss):

 

 

 

 

 

 

 

 

Basic

 

$

1.00

 

 

$

(0.16

)

Diluted

 

$

0.99

 

 

$

(0.16

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

6,907

 

 

 

6,957

 

Diluted

 

 

6,989

 

 

 

6,957

 

 

See notes to consolidated financial statements.

F-4


SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED JUNE 30, 2021 AND 2020

(All amounts in thousands)

 

 

 

Common Shares

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings  (Loss)

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Shareholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2019

 

 

6,987

 

 

$

3,493

 

 

$

10,744

 

 

$

1,059

 

 

$

(253

)

 

$

15,043

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1,140

)

 

 

0

 

 

 

(1,140

)

Minimum pension liability adjustment

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(86

)

 

 

(86

)

Share-based compensation

 

 

0

 

 

 

0

 

 

 

28

 

 

 

0

 

 

 

0

 

 

 

28

 

Shares repurchased

 

 

(88

)

 

 

(43

)

 

 

(59

)

 

 

0

 

 

 

0

 

 

 

(102

)

JUNE 30, 2020

 

 

6,899

 

 

 

3,450

 

 

 

10,713

 

 

 

(81

)

 

 

(339

)

 

 

13,743

 

Net earnings

 

 

0

 

 

 

0

 

 

 

0

 

 

 

6,890

 

 

 

0

 

 

 

6,890

 

Minimum pension liability adjustment

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

177

 

 

 

177

 

Share options exercised

 

 

25

 

 

 

13

 

 

 

(13

)

 

 

0

 

 

 

0

 

 

 

0

 

JUNE 30, 2021

 

 

6,924

 

 

$

3,463

 

 

$

10,700

 

 

$

6,809

 

 

$

(162

)

 

$

20,810

 

 

See notes to consolidated financial statements.

F-5


SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2021 AND 2020

(All amounts in thousands)

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

6,890

 

 

$

(1,140

)

Adjustments to reconcile net loss to net cash provided by

   (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,361

 

 

 

1,450

 

Forgiveness of PPP loans

 

 

(264

)

 

 

0

 

Share-based compensation

 

 

0

 

 

 

28

 

Gain on disposal of property, plant and equipment

 

 

(13

)

 

 

(192

)

Change in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

126

 

 

 

400

 

Inventory

 

 

(24

)

 

 

150

 

Employee retention credits receivable

 

 

(3,586

)

 

 

0

 

Prepaids and other assets

 

 

12

 

 

 

10

 

Accounts payable and accrued expenses

 

 

403

 

 

 

(1,838

)

Deferred relief funds

 

 

(4,095

)

 

 

4,532

 

Accrued sales taxes

 

 

555

 

 

 

569

 

Net cash provided by operating activities

 

 

1,365

 

 

 

3,969

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from sale of property, plant & equipment

 

 

43

 

 

 

559

 

Expenditures for property, plant and equipment—continuing operations

 

 

(2,595

)

 

 

(1,185

)

Net cash used in investing activities

 

 

(2,552

)

 

 

(626

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repurchase of common shares

 

 

0

 

 

 

(102

)

Proceeds from new long-term debt

 

 

0

 

 

 

3,234

 

Payment of long-term debt

 

 

(35

)

 

 

(3,033

)

Net cash provided by (used in) financing activities

 

 

(35

)

 

 

99

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(1,222

)

 

 

3,442

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

 

 

Beginning of year

 

 

11,184

 

 

 

7,742

 

End of year

 

$

9,962

 

 

$

11,184

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Assets acquired in exchange for note receivable

 

$

0

 

 

$

371

 

Right-of-use assets obtained for lease liabilities

 

$

1,179

 

 

$

1,498

 

Cash paid for (received from):

 

 

 

 

 

 

 

 

Income taxes

 

$

293

 

 

$

(349

)

Interest

 

$

(1

)

 

$

6

 

 

See notes to consolidated financial statements.

F-6


 

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED JUNE 30, 2021 AND 2020

(All dollar amounts in thousands, except per share amounts)

1. BUSINESS OPERATIONS

SunLink Health Systems, Inc., through subsidiaries (“SunLink”, “we”, “our”, “ours”, “us” or the “Company”), owns businesses which are providers of healthcare services in certain markets in the United States. SunLink’s business is composed of the ownership of two business segments:

Healthcare Services

 

A subsidiary which owns and operates Trace Regional Hospital and Trace Expended Care and Rehabilitation Center (“Trace”), an 84 licensed-bed acute care hospital, located in Houston, Mississippi, which includes an 18-bed geriatric psychology unit (“GPU”), and a 66-bed extended care and rehabilitation center. This facility focuses primarily on senior healthcare services.

 

A subsidiary, SunLink Health Systems Technology (“SHST Technology”), which provides information technology (“IT”) to outside customers and to SunLink subsidiaries.  

 

A subsidiary which owns approximately five (5) acres of unimproved land in Houston, Mississippi.

 

A subsidiary which owns approximately 25 acres of unimproved land in Ellijay, Georgia.

Pharmacy

The Pharmacy segment, which is composed of four operational areas:

 

Retail pharmacy products and services, consisting of retail pharmacy sales conducted in rural markets at two locations in Louisiana.

 

Institutional pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to institutional clients or to patients in institutional settings, such as extended care and rehabilitation centers, nursing homes, assisted living facilities, behavioral and specialty hospitals, hospice, and correctional facilities.

 

Non-institutional Pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to clients or patients in non-institutional settings including private residential homes.

 

Durable medical equipment products and services (“DME”), consisting primarily of the sale and rental of products for institutional clients or to patients in institutional settings and patient-administered home care.

SunLink subsidiaries have conducted the Healthcare Services business since 2001 and the Pharmacy operations since 2008. Our Pharmacy segment currently is operated through Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”), a subsidiary of our SunLink ScriptsRx, LLC subsidiary.

Throughout these notes to the consolidated financial statements, 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 that the publicly traded Company or any particular subsidiary of the Company owns or operates any asset, business or property. The operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc.

COVID-19 Pandemic and CARES Act Funding

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.

F-7


In late December 2020, we began receiving allotments of COVID-19 vaccine and have vaccinated 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 extended care and rehabilitation center admissions and clinic visits, and hospital services have substantially decreased. 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. Extended care and rehabilitation centers nursing home admissions 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 six fiscal quarters results.

 

During the period April 1, 2020 through June 30, 2021, our Healthcare and Pharmacy segments received $5,370 in general and targeted Provider Relief Fund (“PRF”) distributions. During the quarter ended June 30, 2020, we also received $3,234 in Paycheck Protection Program (“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 $8,604 of such funding.

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 designated, allowable healthcare-related expenses and capital expenditures attributable to COVID-19 and for “Lost Revenues” as defined by HHS.  Such 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 has been met. On June 11, 2021, revised HHS guidance was released which revised reporting requirements for recipients of PRF through HHS’ PRF Reporting Portal (“PRP). PRF received from April 10, 2020 to June 30, 2020 had a deadline to use the funds of June 30, 2021 and the usage is required to be reported to the PRP by September 30, 2021. PRF received from July 1, 2020 to December 31, 2020 has a deadline to use the funds of December 31, 2021 and the usage is required to be reported to the PRP by March 31. 2022. PRF received from January 1, 2021 to June 30, 2021 has a deadline to use the funds of June 30, 2022 and the usage is required to be reported to the PRP by September 30, 2022. We intend report to HHS by September 30, 2021 the usage of the funds consisting of amounts used for defined COVID-19 expenses and for defined Lost Revenues. Of the $5,370 of PRF s received during the period April 1, 2020 through June 30, 2021, we are reporting $4,933 of PRF as other income in our consolidated statement of operations for our fiscal year ended June 30, 2021 related to COVID-19 related expenses and Lost Revenues. The unrecognized amount of PRF 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 we may have to return the unutilized portion of those funds, if any, in the future.

PPP loan forgiveness is available if the loans were used to pay wages, rent, utilities and interest on certain debt during the 24-week period following receipt of the loan proceeds, subject to Federally-established terms and conditions.  During the quarter ended June 30, 2021, $261 of our PPP loans and $3 of related accrued interest were forgiven by the SBA and $264 was recorded as income relating to the PPP loan forgiveness in the quarter ended June 30, 2021. In July and August 2021, we received notification that the remaining outstanding $2,972 of PPP loans and $38 of related accrued interest was forgiven by the SBA.  During the quarter ended September 30, 2021, we expect to record $3,010 of income for PPP loan forgiveness.  

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to employer retention tax credits previously made available under the CARES Act, including modifying and extending the Employee

F-8


Retention Credit (“ERC”) through June 30, 2021. As a result of the new legislation eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020 through June 30, 2021.  Qualified wages are limited to $10 per employee per calendar quarter in 2021. Thus, the maximum ERC available is $7 per employee per calendar quarter, for a total of $14 in 2021.  

    Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either (1) A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or (2) A decline in gross receipts in a 2021 calendar quarter where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019. The Company qualified for ERC for the first and second calendar quarters of 2021 due to the decrease in gross receipts and is applying for ERC totaling $3,586 through amended quarterly payroll tax filings for the applicable quarters. These tax credits were recorded as a reduction of salaries, wages and benefits in our consolidated statement of operations and comprehensive earnings and loss.  

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, extended care and rehabilitation center and pharmacy operations; existing and potential government assistance that may be provided; and the requirements of PRF receipts, including our ability to retain such PRF received.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — The consolidated financial statements include the accounts of SunLink and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Management Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates made by management involve reserves for adjustments to net patient service revenues, evaluation of the recoverability of assets, including accounts receivable and intangible assets, and the assessment of litigation and contingencies, including income taxes and related tax asset valuation allowances, all as discussed in more detail in the remainder of these notes to the consolidated financial statements. Actual results could differ materially from these estimates.

Net Patient Service Revenue — Effective July 1, 2018, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”), which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented. ASC 606 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The adoption of the provisions of ASC 606 had no material impact on the Company’s current or historical financial position, results of operations or cash flows. Additionally, management does not anticipate that the provisions of ASC 606 will have a material impact on the amount or timing of when the Company recognizes revenue prospectively. However, in accordance with ASC 606, the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to

F-9


arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented. Subsequent material events that alter the payor’s ability to pay are recorded as bad debt expense. The Company’s revenue recognition and accounts receivable policies are more fully described in Note 4. Revenue Recognition and Accounts Receivable.

SunLink’s subsidiaries have agreements with third-party payors that provide for payments at amounts different from established charges. Payment arrangements vary and include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Patient service revenues are reported as services are rendered at the estimated net realizable amounts from patients, third-party payors, and others. Estimated net realizable amounts are estimated based upon contracts with third-party payors, published reimbursement rates, and historical reimbursement percentages pertaining to each payor type. Estimated reductions in revenues to reflect agreements with third-party payors and estimated retroactive adjustments under such reimbursement agreements are accrued during the period the related services are rendered and are adjusted in future periods as interim and final settlements are determined. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to accrue such revenue deductions. At June 30, 2021, there were no material claims or disputes with third-party payors.

  

Concentrations of Credit Risk —SunLink’s Healthcare Services segment subsidiaries grant unsecured credit to their patients, most of who reside in the service area of the subsidiaries’ facilities and are insured under third-party agreements. Medicare and Medicaid patient accounts represent SunLink’s only significant concentrations of credit risk. For SunLink’s Healthcare Services segment, Medicare net revenues were approximately 52% and 52% of net revenues for the years ended June 30, 2021 and 2020, respectively. For SunLink’s Healthcare Services segment, Medicaid was approximately 31% and 32% net revenues for the years ended June 30, 2021 and 2020, respectively.  

SunLink’s Pharmacy segment subsidiary grants unsecured credit to individual customers and institutional customers. Individual customers primarily are insured under third-party agreements, including Medicare and Medicaid, while the institutional customers are granted credit according to their determined credit risk. Medicare receivables were approximately 21% and 23% of the Pharmacy segment’s receivables at June 30, 2021 and 2020, respectively, while Medicaid receivables were approximately 24% and 23% of the Pharmacy segment receivable at June 30, 2021 and 2020, respectively.

Cash and Cash Equivalents —Cash and cash equivalents consist of all funds in banks and short-term liquid investments with an original maturity of three months or less. Cash deposited with commercial banks at June 30, 2021 was $9,962, of which approximately $9,140 totaled amounts greater than the federally insured limits. At June 30, 2021, the Company’s cash equivalents included $3,265 of overnight repurchase agreements.  The Company accounts for these agreements as cash equivalents in accordance with FASB ASC 305-10-20. The investing of cash in amounts greater than the insurable limits with major well-capitalized financial institutions mitigates the risk of the deposited cash and the certificate of deposit. The overnight repurchase agreements are 102% collateralized by U. S. government backed securities with the Company’s U.S. bank. The U.S. Government backed collateralized securities are of high credit quality which mitigates any significant risk to the credit rating or interest rate risk of the agreements.

Inventory —Inventory consists of medical and pharmacy supplies. Medical supplies are valued at the lower of cost or market, using the first-in, first-out method. Pharmacy supplies are stated at the lower of cost (standard cost method), or net realizable value. Use of this method does not result in a material difference from the methods required by generally accepted accounting principles in the United States of America.

Accounts Receivable —Substantially all of SunLink’s subsidiaries’ receivables result from providing healthcare services to hospital facility patients and from providing pharmacy services and products to customers. The Company evaluates the valuation of accounts receivable based upon its historical collection trends, as well as its understanding of the nature and collectability of accounts based on their age and other factors.

Government Grant Accounting—As a result of the COVID-19 pandemic, SunLink subsidiaries have received grants from the U.S. government under the CARES Act as targeted Provider Relief Funds. We recognize the grants, based on the amounts of COVID-19 related costs and Lost Revenues (as defined) on a systematic and rational basis in the Consolidated Statement of Operations into other income once there is reasonable assurance that we can comply with the relevant conditions of the specific grant and the grant has been or be will be received. The amount of the grant recognized into other income at any point in time is based on the terms of the grant received. Any unearned portions of the grants are deferred and shown as a current liability on our balance sheet.

Property, Plant, and Equipment —Property, plant, and equipment, including equipment subject to capital leases, is recorded at cost. Depreciation is recognized over the estimated useful lives of the assets, which range from 3 to 45 years, on a straight-line basis. Generally, furniture and fixtures are depreciated over 5 to 10 years, machinery and equipment over 10 years, and buildings over 25 to 45 years. Leasehold improvements and leased machinery and equipment are depreciated over the lease term or estimated useful

F-10


life of the asset, whichever is shorter, and range from 5 to 15 years. For the Pharmacy segment, durable medical equipment is depreciated over 3 years. Expenditures for major renewals and replacements are capitalized. Expenditures for maintenance and repairs are charged to operating expense as incurred. When property items are retired or otherwise disposed of, amounts applicable to such items are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Depreciation expense totaled $1,335 and $1,350 for the years ended June 30, 2021 and 2020, respectively.

Leases — On July 1, 2019, the Company adopted cumulative accounting standard updates initially by the Financial Accounting Standards Board (“FASB”) that amended the accounting for leases and are codified as ASC 842. SunLink and its subsidiaries recognize right-of-use assets and lease liabilities for leases with terms greater than 12 months or leases that contain a purchase option that is reasonably certain to be exercised.  Leases are classified as either finance or operating leases.  This classification whether lease expense is recognized based on an effective interest method or on a straight-line method over the term of the lease.  Our right-of-use assets and liabilities primarily relate to office and warehouse facilities, healthcare equipment and office equipment.  Certain of our facility leases include one or more option to renew.  The exercise of lease renewal options is at our option.  None of our lease agreements contain material residual value guarantees.  

Risk Management —SunLink and its subsidiaries are exposed to various risks of loss from professional liability and other claims and casualties; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters (including earthquakes and hurricanes); and employee health, dental and accident benefits. Commercial insurance coverage is purchased for a portion of claims arising from such matters.

When, in management’s judgment, claims are sufficiently identified, a liability is accrued for estimated costs and losses under such claims, net of estimated insurance recoveries except where applicable laws, rules or regulations require us to report the gross estimate of potential or estimated losses.

The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition of a business. These amounts are based on actuarially determined estimates.

The Company self-insures for workers’ compensation risk. The estimated liability for workers’ compensation risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. The Company is also self-insured for employee health risks. The estimated liability for employee health risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported.

The Company accrues an estimate of losses resulting from workers’ compensation and professional liability claims to the extent they are not covered by insurance. These accruals are estimated quarterly based upon management’s review of claims reported and historical loss data.

The Company records a liability pertaining to pending litigation if it is probable a loss has been incurred and accrues the most likely amount of loss based on the information available. If no amount within the range of losses estimated from the information available is more likely than any other amount in the range of loss, the minimum amount in the range of loss is accrued. Because of uncertainties surrounding the nature of litigation and the ultimate liability to SunLink and its subsidiaries, if any, estimates are revised as additional facts become known.

Long-lived Assets —SunLink and its subsidiaries periodically assesses the recoverability of assets based on its expectations of future profitability and the undiscounted cash flows of the related operations and, when circumstances dictate, adjust the carrying value of the asset to estimated fair value. These factors, along with management’s plans with respect to the operations, are considered in assessing the recoverability of long-lived assets.

Goodwill and Intangibles —Goodwill represents the cost of acquired businesses in excess of fair value of identifiable tangible and intangible net assets purchased. Goodwill has an indefinite life and is not subject to periodic amortization. However, goodwill is tested at least annually for impairment, using a fair value methodology, in lieu of amortization. Definite-life intangible assets are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 2 to 30 years. SunLink and its subsidiaries evaluate the reasonableness of the useful lives of intangible assets and they are tested for impairment as conditions warrant.

Income Taxes —SunLink accounts for income taxes using an asset and liability approach and the recognition of deferred tax assets and liabilities for expected future tax consequences. SunLink considers all expected future events other than proposed enactments of changes in the income tax law or rates. When management determines that it is more likely than not that a portion of or none of the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies, management provides a valuation allowance for the portion not expected to be realized.

F-11


   Share-Based Compensation —The Company has issued common share options to key employees and directors under various shareholder-approved plans. Share-based compensation expense of $0 and $28 for the fiscal years ended June 30, 2021 and 2020, respectively, was recorded in salaries, wages and benefits expense for share options issued to employees and directors of the Company. The fair value of the share options was estimated using the Black-Scholes option pricing model. The historical volatility is used to calculate the estimated volatility in this model.

Fair Value of Financial Instruments —The recorded values of cash, receivables, and payables approximate their fair values because of the relatively short maturity of these instruments. Similarly, the fair value of long-term debt is estimated to approximate the recorded value due to its current variable interest rate.

Fair Value Measurements —Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. Generally Accepted Accounting Principles (“GAAP”) fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

Level 1:  Quoted market prices in active markets for identical assets or liabilities.

Level 2:  Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3:  Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability.

Earnings (Loss) per Share —Earnings (loss) per common share is based on the weighted-average number of common shares and dilutive common share equivalents outstanding for each period presented, including vested and unvested shares issued under SunLink’s 2005 Equity Incentive Plan, and the 2011 Director Stock Option Plan. Common share equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options.

3. DISCONTINUED OPERATIONS

All of the businesses discussed below are reported as discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation.

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 (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 the segment when this 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, 2021 and 2020.

F-12


Results for all the businesses included in discontinued operations are presented in the following table:

 

Discontinued Operations—Summary Statement of Earnings Information

 

 

 

2021

 

 

2020

 

Net Revenues:

 

 

 

 

 

 

 

 

Sold Hospitals

 

$

191

 

 

$

37

 

 

 

$

191

 

 

$

37

 

 

 

 

 

 

 

 

 

 

Earnings (Loss)  before Income Taxes:

 

 

 

 

 

 

 

 

Sold Hospitals

 

$

33

 

 

$

(418

)

Life sciences and engineering

 

 

(80

)

 

 

(136

)

Earnings (loss) before income taxes

 

 

(47

)

 

 

(554

)

Income tax expense

 

 

0

 

 

 

0

 

Earnings (Loss) from discontinued operations

 

$

(47

)

 

$

(554

)

 

4. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLES

Effective July 1, 2018, the Company adopted the provisions of ASC) 606, “Revenue from Contracts with Customers” which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented. ASC 606 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The adoption of the provisions of ASC 606 had no material impact on the Company’s current or historical financial position, results of operations or cash flows. Additionally, management does not anticipate that the provisions of ASC 606 will have a material impact on the amount or timing of when the Company recognizes revenue prospectively. However, in accordance with ASC 606 the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented. Subsequent material events that alter the payor’s ability to pay are recorded as bad debt expense.

Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. A reconciliation of disaggregated revenue to segment revenue is disclosed in Note 17. Financial Information by Segment.

The Company’s service specific revenue recognition policies are as follows:

F-13


Healthcare Services

The Company’s revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rates, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.

Pharmacy

The Company’s revenue is derived primarily from providing pharmacy goods and services to patients and is recognized on the date goods and services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. Revenue is recognized when control of the promised goods or services are transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Each prescription claim represents a separate performance obligation of the Company, separate and distinct from other prescription claims under customer arrangements. Significant portions of the revenue from sales of pharmaceutical and medical products are reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and reduces revenue at the revenue recognition date, to properly account for the variable consideration due to anticipated differences between billed and reimbursed amounts. Accordingly, the total net revenues and receivables reported in the Company’s financial statements are recorded at the amount expected to be ultimately received from these payors.

Medicare Revenue

Net healthcare services revenue is recorded under the Medicare prospective payment system based on an episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a patient, regardless of whether the same provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.

The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Revenue is also adjusted for estimates for variable consideration. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.

In addition to revenue recognized on completed services, the Company also recognizes a portion of revenue associated with services in progress. Services in progress are days of care that begin during the reporting period but were not completed as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of services in progress at the end of the reporting period, expected Medicare revenue per episode and its estimate of the average percentage complete based on services performed.

 

Non-Medicare Revenue

The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for service-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.

 

Revenue is recorded on an accrual basis based upon the date of service at amounts equal to its established or estimated per-visit rates, and adjusted for estimates for variable consideration, as applicable.

 

F-14


 

Practical Expedients and Exemptions

The Company’s contracts with its patients have an original duration of one year or less, therefore, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs, and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

The Company’s revenues by payor were as follows for the years ended June 30, 2021 and 2020:

 

 

 

2021

 

 

2020

 

Medicare

 

$

18,194

 

 

$

20,013

 

Medicaid

 

 

10,522

 

 

 

13,956

 

Retail and Institutional Pharmacy

 

 

6,090

 

 

 

6,465

 

Managed Care & Other Insurance

 

 

5,094

 

 

 

6,742

 

Self-pay

 

 

510

 

 

 

498

 

Rent

 

 

0

 

 

 

16

 

Other

 

 

275

 

 

 

123

 

Total Net Revenues

 

$

40,685

 

 

$

47,813

 

 

 

Settlements of prior year Medicare and Medicaid cost reports contributed net revenues from continuing operations of $69 for the year ended June 30, 2021 and net revenues of $139 for the year ended June 30, 2020. 

5. INVENTORY

Inventory consisted of the following:

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

Healthcare Services segment, supplies inventory

 

$

200

 

 

$

152

 

Pharmacy segment, goods held for sale

 

 

1,690

 

 

 

1,714

 

 

 

$

1,890

 

 

$

1,866

 

 

6. LEASES

On July 1, 2019, the Company adopted cumulative accounting standard updates initially issued by the FASB that amend the accounting for leases and are codified as ASC 842. These lease accounting changes require operating leases be recorded on the balance sheet through the recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right-of-use (“ROU”) asset.  The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. Leases with an initial term of 12 months or less which do not have an option to purchase the underlying asset that is deemed reasonably certain to be exercised are not recorded on the balance sheet; rather, rent expense for these leases is recognized on a straight-line basis over the lease term, or when incurred if a month-to-month lease. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company’s incremental borrowing rate is utilized. Our lease agreements do not contain any material residual value guarantees.

F-15


The Company elected the amended transition requirements allowed for by the FASB in ASU 2018-11, which provides relief from requirements to recast prior comparative periods under ASC 842. As a result, the prior year comparative financial statements have not been restated to reflect the adoption of ASC 842. Additionally, the Company elected the “package of practical expedients” available in ASC 842 whereby an entity need not reassess expired contracts for lease identification or classification as a finance or operating lease, or reassess the initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. Certain of the Company’s lease agreements have lease and non-lease components, which for the majority of leases the Company accounts for separately when the actual lease and non-lease components are determinable. For equipment leases with immaterial non-lease components incorporated into the fixed rent payment, the Company accounts for the lease and non-lease components as a single lease component in determining the lease payment.

The adoption of ASC 842 on July 1, 2019 resulted in the Company recording $1,423 of operating lease liabilities and an equal amount of ROU assets with no impact on retained earnings. The adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows for the fiscal year ended June 30, 2020.   

The Company has operating leases and a financing lease relating to its pharmacy operations, medical office buildings, certain medical equipment and office equipment. All lease agreements generally require the Company to pay maintenance, repairs, property taxes and insurance costs, which are variable amounts based on actual costs. Variable lease costs also include escalating rent payments that are not fixed at commencement but are based on an index determined in future periods over the lease term based on changes in the Consumer Price Index or other measure of cost inflation. Some leases include one or more options to renew the lease at the end of the initial term, with renewal terms that generally extend the lease at the then market rental rates. Leases may also include an option to buy the underlying asset at or a short time prior to the termination of the lease. All such options are at the Company’s discretion and are evaluated at the commencement of the lease, with only those that are reasonably certain of exercise included in determining the appropriate lease term. The components of lease cost and rent expense for the fiscal years ended June 30, 2021 and 2020 are as follows:

 

 

 

Fiscal Year Ended

 

 

Fiscal Year Ended

 

Lease Cost

 

June 30, 2021

 

 

June 30, 2020

 

Operating lease cost:

 

 

 

 

 

 

 

 

Operating lease cost

 

$

514

 

 

$

593

 

Short-term rent expense

 

 

37

 

 

 

5

 

Variable lease cost

 

 

2

 

 

 

3

 

Total operating lease cost

 

$

553

 

 

$

601

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization right-of-use assets

 

$

36

 

 

$

36

 

Interest on finance lease liabilities

 

 

7

 

 

 

9

 

Total finance lease cost

 

$

43

 

 

$

45

 

 

Supplemental balance sheet information relating to leases was as follows:

 

 

 

 

 

As of

 

 

As of

 

 

 

Balance Sheet Classifications

 

June 30, 2021

 

 

June 30, 2020

 

Operating Leases:

 

 

 

 

 

 

 

 

 

 

Operating Lease ROU Assets

 

ROU Assets

 

$

1,251

 

 

$

970

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases:

 

 

 

 

 

 

 

 

 

 

Finance Lease ROU Assets

 

Property, plant and equipment

 

 

203

 

 

 

203

 

Accumulated amortization

 

Accumulated depreciation

 

 

72

 

 

 

43

 

Current finance lease liabilities

 

Current maturities of long-term debt

 

 

37

 

 

 

34

 

Long-term finance lease liabilities

 

Long-term debt

 

 

52

 

 

 

90

 

 

F-16


 

Supplemental cash flow and other information related to leases as of and for the years ended June 30, 2021 and 2020 are as follows:

 

 

 

Fiscal Year Ended

 

 

Fiscal Year Ended

 

Other information

 

June 30, 2021

 

 

June 30, 2020

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

511

 

 

$

593

 

Operating cash flows from finance leases

 

7

 

 

9

 

Financing cash flow from finance leases

 

34

 

 

32

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

0

 

 

0

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

1,179

 

 

 

1,498

 

Weighted-average remaining lease term:

 

 

 

 

 

 

 

 

Operating leases

 

4.07

 

 

3.75

 

Finance leases

 

2.41

 

 

3.41

 

Weighted-average discount rate:

 

 

 

 

 

 

 

 

Operating leases

 

 

1.53

%

 

 

2.79

%

Finance leases

 

 

6.54

%

 

 

6.54

%

 

Commitments relating to non-cancellable operating and finance leases as of June 30, 2021 for each of the next five years and thereafter are as follows:

 

Payments due within

 

Operating Leases

 

 

Finance Leases

 

1 year

 

$

415

 

 

$

42

 

2 years

 

 

256

 

 

 

42

 

3 years

 

 

248

 

 

 

13

 

4 years

 

 

241

 

 

 

0

 

5 years

 

 

132

 

 

 

0

 

Over 5 years

 

 

10

 

 

 

0

 

Total minimum future payments

 

 

1,302

 

 

 

97

 

Less: Imputed interest

 

 

(24

)

 

 

(8

)

Total liabilities

 

 

1,278

 

 

 

89

 

Less: Current portion

 

 

(403

)

 

 

(37

)

Long-term liabilities

 

$

875

 

 

$

52

 

 

 

7. IMPAIRMENT OF LONG-LIVED ASSETS

Impairment of Intangible Assets— See Note 8. Intangible Assets for discussion of impairment analysis of Intangible Assets.

Impairment analysis —For the purposes of these analyses, our estimates of fair value are based on a combination of the income approach, which estimates the fair value based on future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices. Estimates of fair value for reporting units fall under Level 3 of the fair value hierarchy. Estimates of future discounted cash flows are based on assumptions and projections we believe to be currently reasonable and supportable. These assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns.

 

F-17


 

8. INTANGIBLE ASSETS

SunLink’s Pharmacy segment has intangible assets related to its Carmichael acquisition, which consists of:

    

Intangible assets:

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

Pharmacy segment

 

 

 

 

 

 

 

 

Trade Name

 

$

1,180

 

 

$

1,180

 

Customer Relationships

 

 

1,089

 

 

 

1,089

 

Medicare License

 

 

623

 

 

 

623

 

 

 

 

2,892

 

 

 

2,892

 

Accumulated Amortization

 

 

(1,665

)

 

 

(1,638

)

Total

 

$

1,227

 

 

$

1,254

 

 

Impairment testing —During the fourth quarters of fiscal 2020 and 2019, we completed our annual impairment test of certain intangible assets, and no impairment was indicated.

The Trade Name intangible asset under the Pharmacy segment is a non-amortizing intangible asset. Customer Relationships intangible asset is being amortized over 12 years and Medicare License intangible asset is being amortized over 15 years. Amortization expense was $ 27 and $99 for the fiscal years ended June 30, 2021 and 2020, respectively.

Annual amortization of amortizing intangibles for the next five years is as follows:

 

2022

 

$

26

 

2023

 

 

21

 

2024

 

 

0

 

2025

 

 

0

 

2026 and thereafter

 

 

0

 

Total

 

$

47

 

 

9. LONG-TERM DEBT

Long-term debt consisted of the following:

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

CARES Act Paycheck Protection Plan Loans

 

$

2,972

 

 

$

3,234

 

Capital lease obligations

 

 

89

 

 

 

124

 

Total

 

 

3,061

 

 

 

3,358

 

Less current maturities

 

 

(3,009

)

 

 

(1,401

)

 

 

$

52

 

 

$

1,957

 

 

CARES Act Paycheck Protection Plan Loans— The CARES Act was enacted by the U.S. government on March 27, 2020. As part of the CARES Act, the PPP loan program was established and administered by the SBA. In April and May 2020, subsidiaries of the Company received approximately $3,234 of PPP loans through its regular bank. Forgiveness of PPP loans is generally available if the loans are used to pay wages, rent, utilities and interest on certain debt during the 24-week period following receipt of the loan proceeds and subject to other Federally-established terms and conditions. During fiscal 2021, we made forgiveness applications for all our PPP loans.  Forgiveness applications were reviewed by both the lending bank and SBA and loan forgiveness amounts were determined. During the quarter ended June 30, 2021, $261 of our PPP loans and $3 of related accrued interest were forgiven by the SBA and $264 was recorded as income relating to the PPP loan forgiveness in the quarter ended June 30, 2021. In July and August 2021, we received notification that the remaining outstanding $2,972 of PPP loans and $38 of related accrued interest was forgiven by the SBA.  During the quarter ended September 30, 2021, we will record $3,010 of income for PPP loan and accrued interest forgiveness.

F-18


 

Debt Commitments —Annual required payments of debt and contractual commitments for interest on long-term debt are shown in the following table. The PPP loans of $2,972 included in debt below were forgiven by the SBA in July and August 2021 under the terms of the loan program. The interest rate on variable interest debt is calculated at the interest rate at June 30, 2021.

 

 

 

Debt

 

 

Interest

 

2022

 

$

3,009

 

 

$

43

 

2023

 

 

36

 

 

 

5

 

2024

 

 

16

 

 

 

1

 

2025

 

 

0

 

 

 

0

 

2026

 

 

0

 

 

 

0

 

2027 and after

 

 

0

 

 

 

0

 

Total

 

$

3,061

 

 

$

49

 

 

 

10. SHAREHOLDERS’ EQUITY

Employee and Directors Stock Option Plans —The 2011 Director Stock Option Plan was approved by SunLink’s shareholders at the Annual Meeting of Shareholders on November 7, 2011. This plan permits the grant of options to non-employee directors of SunLink for the purchase of up to 300,000 common shares through November 2021.  No options were granted during the fiscal year ended June 30, 2021 and options for 50,000 shares were granted during the fiscal year ended June 30, 2020. Options for 70,000 shares were exercised during the fiscal year ended June 30, 2021. Options outstanding under the plan were 230,000 shares at June 30, 2021. 

The 2005 Equity Incentive Plan approved by SunLink’s shareholders on November 7, 2005 permitted the grant of options to employees, non-employee directors and service providers of SunLink for the purchase of up to 800,000 common shares plus the number of unused shares under its 2001 Plans, which were 30,675. No options have been exercised under this Plan. No option shares were granted during the fiscal years ended June 30, 2021 and 2020, respectively. Options for 165,000 shares were forfeited during the fiscal year ended June 30, 2020. Options outstanding under this Plan were 180,000 at June 30, 2021. No additional awards may be granted under this Plan.

The activity of Company’s share options is shown in the following table:

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Range of

Exercise

Prices

 

Options outstanding June 30, 2019

 

 

595,000

 

 

$

1.53

 

 

$0.71 - $2.09

 

Granted

 

 

50,000

 

 

1.38

 

 

 

1.38

 

Forfeited

 

 

(165,000

)

 

 

2.01

 

 

$1.79 - $2.09

 

Options outstanding June 30, 2020

 

 

480,000

 

 

$

1.35

 

 

$0.71 - $1.79

 

Granted

 

 

0

 

 

NA

 

 

NA

 

Exercised

 

 

(70,000

)

 

 

1.39

 

 

$0.71-$1.79

 

Options outstanding June 30, 2021

 

 

410,000

 

 

$

1.34

 

 

$0.71 - $1.79

 

Options exercisable June 30, 2020

 

 

480,000

 

 

$

1.35

 

 

$0.71 - $1.79

 

Options exercisable June 30, 2021

 

 

410,000

 

 

$

1.34

 

 

$0.71 - $1.79

 

 

F-19


 

For the fiscal years ended June 30, 2021 and 2020, the Company recognized $0 and $28, respectively, of compensation expense for share options issued. As of June 30, 2021, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans.

Information with respect to stock options outstanding and exercisable at June 30, 2021 is as follows:

 

Exercise

Prices

 

 

Number

Outstanding

 

 

Weighted-Average

Remaining

Contractual Life

(in years)

 

 

Number

Exercisable

 

$

0.71

 

 

 

12,000

 

 

 

2.21

 

 

 

12,000

 

$

1.21

 

 

 

48,000

 

 

 

5.21

 

 

 

48,000

 

$

1.22

 

 

 

170,000

 

 

 

1.18

 

 

 

170,000

 

$

1.38

 

 

 

40,000

 

 

 

8.20

 

 

 

40,000

 

$

1.49

 

 

 

90,000

 

 

 

3.18

 

 

 

90,000

 

$

1.67

 

 

 

30,000

 

 

 

0.36

 

 

 

30,000

 

$

1.79

 

 

 

20,000

 

 

 

4.20

 

 

 

20,000

 

 

 

 

 

 

410,000

 

 

 

2.89

 

 

 

410,000

 

 

  Options for 70,000 shares were exercised during the year ended June 30, 2021 and no options were exercised during the fiscal year ended June 30, 2020. As of June 30, 2021 and 2020, the aggregate intrinsic value of options outstanding and options exercisable were $594 and $132, respectively.

 

Common Share Purchase Transactions

2019-2020 Common Share Repurchase Program – On October 8, 2019, the Company announced a share repurchase program (“2019-2020 Program”) approved by its Board of Directors which authorized the Company to purchase up to $750 of its common shares in the open market.  On March 24, 2020, the Company announced that it had suspended the 2019-2020 Program in light of the COVID-19 pandemic and on June 1, 2020, the Company terminated the 2019-2020 program. The total number of shares purchased under the Plan was 87,534 and the total cost of such shares was approximately $101 on an average price of per share of $1.15. The chart below shows by month the total shares repurchased and average price per share paid for the 2019-2020 Program.

 

 

 

Total Shares

 

 

Average Price

 

 

 

Purchased

 

 

Per Share Paid

 

November 2019

 

 

935

 

 

$

1.17

 

December 2019

 

 

2,879

 

 

 

1.18

 

January 2020

 

 

4,272

 

 

 

1.15

 

February 2020

 

 

33,873

 

 

 

1.22

 

March 2020

 

 

45,575

 

 

 

1.09

 

Total

 

 

87,534

 

 

$

1.15

 

 

Accumulated Other Comprehensive Loss —Information with respect to the balances of each classification within accumulated other comprehensive loss is as follows:

 

 

 

Minimum

Pension

Liability

Adjustment

 

 

Accumulated

Other

Comprehensive

Loss

 

June 30, 2019

 

$

(253

)

 

$

(253

)

Current period change

 

 

(86

)

 

 

(86

)

June 30, 2020

 

$

(339

)

 

$

(339

)

Current period change

 

 

177

 

 

 

177

 

June 30, 2021

 

$

(162

)

 

$

(162

)

 

F-20


 

11. INCOME TAXES

The provision for income taxes on continuing operations are as follows:

 

 

 

2021

 

 

2020

 

Current

 

$

63

 

 

$

296

 

Deferred

 

 

0

 

 

 

0

 

Total income tax expense

 

$

63

 

 

$

296

 

 

Net deferred income tax assets recorded in the consolidated balance sheets are as follows:

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

Net operating loss carryforward

 

$

5,856

 

 

$

6,078

 

Depreciation expense

 

 

(98

)

 

 

(86

)

Allowances for receivables

 

 

117

 

 

 

131

 

Accrued liabilities

 

 

268

 

 

 

1,407

 

Intangible assets

 

 

263

 

 

 

585

 

Pension liabilities

 

 

113

 

 

 

165

 

Other

 

 

181

 

 

 

109

 

 

 

 

6,700

 

 

 

8,389

 

Less valuation allowance

 

 

(6,700

)

 

 

(8,389

)

Net deferred income tax assets

 

$

0

 

 

$

0

 

 

The differences between income taxes on continuing operations at the Federal statutory rate and the effective tax rate were as follows:

 

 

 

2021

 

 

2020

 

Income tax expense (benefit) at Federal statutory rate

 

$

1,470

 

 

$

(61

)

Changes in valuation allowance—continuing operations

 

 

(1,076

)

 

 

(369

)

U.S. state income taxes, net of federal benefit

 

 

188

 

 

 

175

 

Prior year true-ups associated with CARES Act receipts

 

 

(587

)

 

 

0

 

Permanent differences relating to CARES Act receipts

 

 

(56

)

 

 

582

 

Deferred tax rate changes

 

 

77

 

 

 

(34

)

Other

 

 

47

 

 

 

3

 

Total income tax expense (benefit)—continuing operations

 

$

63

 

 

$

296

 

 

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 on December 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 related to the Company are related to the amounts for ERC and amounts received as general and targeted PRF. Based on the latest published IRS guidance as of the preparation of the June 30, 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. 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, on December 27, 2020, Congress specifically allows the deduction of any expenses associated with forgiven PPP loan proceeds.  It is the Company’s assumption at June 30, 2021 that all PPP Loan associated expenses will be deductible for income tax. The Company has sufficient federal net operating losses for the period to cover the resulting provisional June 30, 2021 taxable income, The year ended June 30, 2021 current tax expense represents the state income tax accrued resulting the ERC accrued and associated disallowed wages and PRF received during the period.

F-21


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.

At June 30, 2021, consistent with the above process, we evaluated the need for a valuation allowance 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 $6,700 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability at June 20, 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 performance.

The principal negative evidence that led us to determine at June 30, 2021 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 $15,631.

For Federal income tax purposes, at June 30, 2021, the Company had approximately $15,631 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, 2018 are no longer subject to potential federal and state income tax examination.

12. EMPLOYEE BENEFITS

Defined Benefit Plans —No defined benefit plan is currently maintained for employees of SunLink, the Healthcare Services segment or the Pharmacy segment. Prior to 1997, SunLink maintained a defined benefit retirement plan covering substantially all of its domestic employees. Effective February 28, 1997, SunLink amended its domestic retirement plan to freeze participant benefits and closed the plan to new participants. Benefits under the frozen plan are based on years of service and level of earnings. SunLink funds the frozen plan, which is noncontributory, at a rate that meets or exceeds the minimum amounts required by the Employee Retirement Income Security Act of 1974.

Since the sale of SunLink’s life sciences and engineering segment businesses in the fiscal year ended March 31, 1999, net pension expense has been classified as an expense of discontinued operations.

At June 30, 2021, the plan’s assets were invested 43% in cash and short-term investments, 42% in equity investments and 15% in fixed income investments. The plan’s current investment policy of primarily investing in cash and short-term investments is based on the possible need for immediate liquidity as benefits are paid and participants withdraw from the plan. The expected return on investment of 4% is based upon the plan’s historical return on assets. The plan expects to pay $51, $55, $61, $173, and $67 in pension benefits in the years ending June 30, 2022 through 2026, respectively. The plan expects to pay $386 in pension benefits for the years June 30, 2026 through 2030, in the aggregate. This assumes the plan participants elect to take monthly pension benefits as opposed to a lump sum payout when they reach age 65. The Company made contributions of $100 and $132 to the plan during the years ended June 30, 2021 and 2020, respectively, and plans to make a contribution of $100 to the plan for the year ended June 30, 2022.

F-22


The components of net pension expense for all plans (comprised solely of one domestic plan) were as follows for the fiscal years ended June 30, 2021 and 2020:

 

 

 

2021

 

 

2020

 

Service cost

 

$

0

 

 

$

0

 

Interest cost

 

 

40

 

 

 

47

 

Expected return on assets

 

 

(38

)

 

 

(34

)

Amortization of prior service cost

 

 

78

 

 

 

123

 

Settlement cost

 

 

0

 

 

 

0

 

Net pension expense

 

$

80

 

 

$

136

 

Weighted-average assumptions:

 

 

 

 

 

 

 

 

Discount rate

 

 

2.60

%

 

 

3.50

%

Expected return on plan assets

 

 

4.00

%

 

 

4.00

%

Rate of compensation increase

 

 

0.00

%

 

 

0.00

%

 

Summary information for the plans (comprised solely of one domestic plan) is as follows for the fiscal years ended June 30, 2021 and 2020:

 

 

 

2021

 

 

2020

 

Change in Benefit Obligation:

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

 

$

1,574

 

 

$

1,390

 

Interest cost

 

 

40

 

 

 

47

 

Actuarial (gain) loss

 

 

(51

)

 

 

168

 

Benefits paid

 

 

(28

)

 

 

(31

)

Benefit obligation end of year

 

$

1,535

 

 

$

1,574

 

Change in Fair Value of Plan Assets:

 

 

 

 

 

 

 

 

Beginning fair value

 

$

923

 

 

$

827

 

Actual return (loss) on plan assets

 

 

85

 

 

 

(5

)

Employer contribution

 

 

100

 

 

 

132

 

Benefits paid

 

 

(28

)

 

 

(31

)

Plan assets at end of year

 

$

1,080

 

 

$

923

 

Funded status of the plans

 

 

(455

)

 

 

(651

)

Unrecognized actuarial loss

 

 

293

 

 

 

469

 

Accrued benefit cost

 

$

(162

)

 

$

(182

)

Amounts Recognized in Consolidated Balance Sheets

 

 

 

 

 

 

 

 

Accrued benefit cost

 

 

(162

)

 

 

(182

)

Accumulated other comprehensive loss*

 

 

293

 

 

 

469

 

Net amount recognized

 

$

(455

)

 

$

(651

)

 

*

Accumulated other comprehensive loss represents minimum pension liability adjustments.

Defined Contribution Plan —SunLink has a defined contribution plan pursuant to IRS Section 401(k) covering substantially all employees. SunLink matches a specified percentage of the employee’s contribution as determined periodically by its management. No match was provided for the fiscal year ended June 30, 2021. A match of $137 was provided for the fiscal year ended June 30, 2020.  Plan expense for the defined contribution plan was $0 for the years ended June 30, 2021 and 2020.

13. SALE OF ASSETS

On December 20, 2019, the Company sold a medical office building and approximately 4 acres of land in Clanton, 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 ended June 30, 2020.   

On September 9, 2019, the Company sold approximately 11.4 acres of undeveloped land in Fulton, 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 ended June 30, 2020.  

F-23


14. SALES TAX PAYABLE

During the fiscal year ended June 30, 2019, the Pharmacy segment business amended its sales tax position to claim exemption from sales taxes on any revenue from sales of products and services to beneficiaries of government insurance programs to the extent reimbursed by the administrators of such programs. No sales taxes are included in the related reimbursement received from sales of such products and services from the government payers’ insurance programs. The Company has filed amended sales tax returns for periods still open under the applicable statutes of limitations. Refunds have been received from two taxing authorities in the amounts claimed in all such amended returns. Accordingly, amounts claimed and received from these two taxing authorities were recorded as revenues in the year ended June 30, 2020 in the amount of $359. The Company’s position with certain other local taxing authorities is still uncertain and has not yet been determined probable of collection; therefore, the Company has continued to accrue the amounts for sales tax estimates that it believes would be payable if its amended returns and continuing position are challenged and the Company does not prevail. The sales tax accrued at June 30, 2021 was $1,966 compared to $1,411 at June 30, 2020.   

15. RELATED PARTIES

A director of the Company is a member of a law firm which provides services to SunLink. The Company has expensed an aggregate of $182 and $251 to the law firm in the fiscal years ended June 30, 2021 and 2020, respectively. Included in the Company’s consolidated balance sheets at June 30, 2021 and 2020 is $21 and $6 of amounts payable to the law firm.

   

 

16. FINANCIAL INFORMATION BY SEGMENTS

 

Under ASC Topic No. 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our two reportable operating segments are Healthcare Services and Pharmacy.

We evaluate performance of our operating segments based on revenue and operating profit (loss).  Segment information for the fiscal years ended June 30, 2021 and 2020 is as follows:

 

 

 

Healthcare

Services

 

 

Pharmacy

 

 

Corporate

and Other

 

 

Total

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenues from external customers

 

$

13,613

 

 

$

27,072

 

 

$

0

 

 

$

40,685

 

Operating profit (loss)

 

 

1,938

 

 

 

1,803

 

 

 

(1,870

)

 

 

1,871

 

Depreciation and amortization

 

 

333

 

 

 

1,026

 

 

 

2

 

 

 

1,361

 

Assets

 

 

10,655

 

 

 

9,978

 

 

 

10,931

 

 

 

31,564

 

Expenditures for property, plant and equipment

 

 

1,346

 

 

 

1,249

 

 

 

0

 

 

 

2,595

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenues from external customers

 

$

16,243

 

 

$

31,570

 

 

$

0

 

 

$

47,813

 

Operating profit (loss)

 

 

734

 

 

 

1,076

 

 

 

(2,139

)

 

 

(329

)

Depreciation and amortization

 

 

361

 

 

 

1,085

 

 

 

4

 

 

 

1,450

 

Assets

 

 

8,174

 

 

 

8,170

 

 

 

11,627

 

 

 

27,971

 

Expenditures for property, plant and equipment

 

 

296

 

 

 

888

 

 

 

1

 

 

 

1,185

 

 

F-24


 

17. EARNINGS PER SHARE

(Share Amounts in Thousands)

Earnings (loss) per share and shares outstanding information for the years ended June 30, 2021 and 2020 is as follows:

 

 

 

2021

 

 

2020

 

 

 

Amount

 

 

Per Share

Amount

 

 

Amount

 

 

Per Share

Amount

 

Earnings (Loss) from continuing operations

 

$

6,937

 

 

 

 

 

 

$

(586

)

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

6,907

 

 

$

1.00

 

 

 

6,957

 

 

$

(0.08

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

6,989

 

 

$

0.99

 

 

 

6,957

 

 

$

(0.08

)

Earnings (loss) from discontinued operations

 

$

(47

)

 

 

 

 

 

$

(554

)

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

6,907

 

 

$

(0.01

)

 

 

6,957

 

 

$

(0.08

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

6,989

 

 

$

(0.01

)

 

 

6,957

 

 

$

(0.08

)

Net earnings (loss)

 

$

6,890

 

 

 

 

 

 

$

(1,140

)

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

6,907

 

 

$

1.00

 

 

 

6,957

 

 

$

(0.16

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

6,989

 

 

$

0.99

 

 

 

6,957

 

 

$

(0.16

)

Weighted-average number of shares outstanding—basic

 

 

6,907

 

 

 

 

 

 

 

6,957

 

 

 

 

 

Effect of dilutive director, employee and guarantor options

   and outstanding common share warrants

 

 

82

 

 

 

 

 

 

 

0

 

 

 

 

 

Weighted-average number of shares outstanding—diluted

 

 

6,989

 

 

 

 

 

 

 

6,957

 

 

 

 

 

 

Share options of  14 for the year ended June 30, 2020 are not included in the computation of diluted earnings per share because their effect would be antidilutive.

 

 

18. Commitments for capital expenditures

At June 30, 2021, the Company has approximately $1,100 of commitments for future capital expenditures for our Trace hospital under its Trace Forward Capital Plan which was announced in March 2021. This Plan expands, upgrades and improves the physical plant, patient care, ancillary services and support areas of the Trace hospital.

 

 

 

F-25


ssy-ex211_16.htm

Exhibit 21.1

LIST OF SUBSIDIARIES

The direct and indirect subsidiaries of SunLink Health Systems, Inc. are listed below:

 

 

 

 

Name of Subsidiary

SunLink Health Systems Technology, Inc.

  

 

SunLink ScriptsRx, LLC

  

 

Crown Healthcare Investments, LLC (f/k/a MedCare South, LLC)

  

 

New Seasons Assisted Living, LLC

  

 

HealthMont LLC

  

 

Dexter Hospital LLC

  

 

Southern Health Corporation of Houston, Inc.

  

 

Southern Health Corporation of Ellijay, Inc.

  

 

Southern Health Corporation of Dahlonega, Inc.

  

 

HealthMont of Georgia Inc.

  

 

HealthMont of Missouri, LLC

  

 

Carmichael’s Cashway Pharmacy, Inc.

  

 

Carmichael’s Nutritional Distributor, Inc.

  

 

CarMed Direct, Inc.

  

 

Breath of Life Home Health Equipment, Inc.

  

 

Southeastern Healthcare Alliance, Inc.

  

 

Central Alabama Medical Associates, LLC

  

 

Castlemark Properties, LLC

  

 

SunLink Healthcare Professional Property, LLC

  

 

Callaland, LLC

  

 

Mountain Drive Properties, LLC

  

 

Gold Rush Development, LLC

  

 

East Madison Property, LLC

Parkside Health Services, LLC

Essential Senior Services, LLC

 

  

 

 


ssy-ex231_14.htm

Exhibit 23.1

 

 

Consent of Independent Accountants

 

We hereby consent to the incorporation by reference in the registration statements (No. 333-137474 and 333-184027) on Forms S-8 of SunLink Health Systems, Inc. of our reports dated September 27, 2021, appearing in this Annual Report on Form 10-K of SunLink Health Systems, Inc. for the year ended June 30, 2021.

 

 

/s/ Cherry Bekaert LLP

 

 

 

Atlanta, Georgia

September 27, 2021

 

 

 


ssy-ex311_6.htm

Exhibit 31.1

CERTIFICATION

I, Robert M. Thornton, Jr., the Chief Executive Officer of SunLink Health Systems, Inc. (the “Company”), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2021 (the “Evaluation Date”) based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter ended on the Evaluation Date, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Dated: September 27, 2021

 

/s/ Robert M. Thornton, Jr.

 

 

Robert M. Thornton, Jr.

 

 

SunLink Health Systems, Inc.

 

 

Chief Executive Officer

 


ssy-ex312_10.htm

Exhibit 31.2

CERTIFICATION

I, Mark J. Stockslager, the Chief Financial Officer of SunLink Health Systems, Inc. (the “Company”), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2021 (the “Evaluation Date”) based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter ended on the Evaluation Date, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Dated: September 27, 2021

 

/s/ Mark J. Stockslager

 

 

Mark J. Stockslager

 

 

SunLink Health Systems, Inc.

 

 

Chief Financial Officer

 


ssy-ex321_9.htm

Exhibit 32.1

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of SunLink Health Systems, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2021, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Robert M. Thornton, Jr., Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

Dated: September 27, 2021

 

/s/ Robert M. Thornton, Jr.

 

 

Robert M. Thornton, Jr.

 

 

SunLink Health Systems, Inc.

Chief Executive Officer

 

 


ssy-ex322_11.htm

Exhibit 32.2

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of SunLink Health Systems, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2021, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Mark J. Stockslager, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

Dated: September 27, 2021

 

/s/ Mark J. Stockslager

 

 

Mark J. Stockslager

 

 

SunLink Health Systems, Inc.

Chief Financial Officer

 


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Attachment: XBRL INSTANCE DOCUMENT


ssy-20210630.xsd
Attachment: XBRL TAXONOMY EXTENSION SCHEMA


ssy-20210630_cal.xml
Attachment: XBRL TAXONOMY EXTENSION CALCULATION LINKBASE


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Attachment: XBRL TAXONOMY EXTENSION DEFINITION LINKBASE


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Attachment: XBRL TAXONOMY EXTENSION LABEL LINKBASE


ssy-20210630_pre.xml
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