UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
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(Address of principal executive offices)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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 filings requirements for the past 90 days.
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 (of for such shorter period that the registrant was required to submit such files).
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 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 |
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Smaller reporting company |
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Emerging growth company |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act:
The number of Common Shares, without par value, outstanding as of May 14, 2024 was
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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March 31, |
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2024 |
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June 30, |
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(unaudited) |
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2023 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables - net |
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Inventory |
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Current assets held for sale |
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Prepaid expense and other assets |
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Total current assets |
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Property, plant and equipment, at cost |
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Less accumulated depreciation |
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Property, plant and equipment - net |
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Noncurrent Assets: |
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Intangible asset |
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Noncurrent assets held for sale |
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Right of use assets |
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Other noncurrent assets |
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Total noncurrent assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued payroll and related taxes |
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Current liabilities held for sale |
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Current operating lease liabilities |
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Other accrued expenses |
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Total current liabilities |
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Long-Term Liabilities |
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Noncurrent liability for professional liability risks |
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Long-term operating lease liabilities |
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Noncurrent liabilities held for sale |
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Other noncurrent liabilities |
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Total long-term liabilities |
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Shareholders’ Equity |
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Preferred Shares, authorized and unissued, |
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Common Shares, par value: |
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Issued and outstanding, |
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Additional paid-in capital |
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Retained earnings (deficit) |
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Accumulated other comprehensive income |
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Total Shareholders’ Equity |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
2
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net revenues |
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$ |
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$ |
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$ |
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$ |
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Costs and Expenses: |
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Cost of goods sold |
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Salaries, wages and benefits |
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Supplies |
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Purchased services |
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Other operating expenses |
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Rent and lease expense |
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Depreciation and amortization |
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Operating Profit (Loss) |
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Other Income (Expense): |
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Gains on sale of assets |
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Interest income (expense), net |
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Earnings (Loss) from Continuing Operations before income taxes |
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Income Tax Benefit |
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Earnings (Loss) from Continuing Operations |
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Loss from Discontinued Operations, net of tax |
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Net Loss |
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Other comprehensive income |
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Comprehensive Loss |
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$ |
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$ |
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$ |
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$ |
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Loss Per Share: |
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Continuing Operations: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Discontinued Operations: |
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Basic |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Net Loss: |
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Basic |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-Average Common Shares Outstanding: |
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Basic |
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Diluted |
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See notes to condensed consolidated financial statements.
3
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Common Shares |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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JUNE 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Share options exercised |
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Net loss |
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SEPTEMBER 30, 2023 |
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Net loss |
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DECEMBER 31, 2023 |
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Net loss |
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MARCH 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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JUNE 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Share options exercised |
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Net loss |
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SEPTEMBER 30, 2022 |
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Net earnings |
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DECEMBER 31, 2022 |
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Net loss |
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MARCH 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
4
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months |
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March 31, |
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2024 |
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2023 |
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Net Cash Used in Operating Activities |
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$ |
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$ |
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Cash Flows Provided by (Used in) Investing Activities: |
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Expenditures for property, plant and equipment - continuing operations |
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Expenditures for property, plant and equipment - discontinued operations |
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Proceeds from sale of property, plant and equipment - continuing operations |
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Proceeds from sale of Trace hospital operations - discontinued operations |
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Net Cash Used in Investing Activities |
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Cash Flows Provided by (Used in) Financing Activities: |
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Proceeds from share options exercises |
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Payments on long-term debt - discontinued operations |
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Net Cash Provided by (Used in) Financing Activities |
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Net Decrease in Cash and Cash Equivalents |
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Cash and Cash Equivalents Beginning of Period |
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Cash and Cash Equivalents End of Period |
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$ |
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$ |
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Supplemental Disclosure of Cash Flow Information: |
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Cash Paid (Received) for: |
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Interest |
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$ |
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$ |
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Income taxes |
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$ |
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$ |
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Non-cash investing and financing activities: |
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Right-of-use assets obtained in exchange for operating lease liabilities |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
5
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2024
(all dollar amounts in thousands except per share amounts)
(Unaudited)
Note 1. –Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements as of March 31, 2024 and for the three and nine month periods ended March 31, 2024 and 2023 have been prepared in accordance with Rule 8-03 and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and, as such, do not include all information required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated June 30, 2023 balance sheet included in this interim filing has been derived from the audited consolidated financial statements at that date but does not include all the information and related notes required by GAAP for complete consolidated financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements included in the SunLink Health Systems, Inc. (“SunLink”, “we”, “our”, “ours”, “us” or the “Company”) Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC on September 28, 2023. In the opinion of management, the Condensed Consolidated Financial Statements, which are unaudited, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the periods indicated. The results of operations for the three and nine month periods ended March 31, 2024 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
Throughout these notes to the condensed 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 the Company owns or operates any particular asset, business or property. Each operation and business described in this filing is owned and operated by a distinct and indirect subsidiary of SunLink Health Systems, Inc.
Note 2. – Business Operations
The Company’s continuing operations are composed of a pharmacy business and an information technology (“IT”) business.
The pharmacy business, is composed of four operational areas conducted in three locations in southwest Louisiana:
· Retail pharmacy products and services, consisting of retail pharmacy sales.
· 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.
A subsidiary, SunLink Health Systems Technology (“SHST Technology”), provides information technology (“IT”) services to outside customers and to SunLink subsidiaries. The Company also owns a subsidiary which owns approximately twenty-five (25) acres of unimproved land in Ellijay, Georgia.
Series C Redeemable Preferred Shares
On August 2, 2023, the Board of SunLink declared a non-cash dividend per Common Share of one fractional interest in one of the Corporation’s Series C Redeemable Preferred Shares (the “Series C Preferred Shares” and each such
6
fraction of a Series C Preferred Share, a “Series C Fractional Interest”).
COVID-19 Pandemic and CARES Act Funding
The Company continued to experience adverse after-effects of the COVID-19 pandemic in the quarter ended March 31, 2024 and believes such effects will likely continue to affect its assets and operations in the foreseeable future, particularly salaries and wages pressure, workforce shortages, supply chain disruption and broad inflationary pressures. Our ability to make estimates of any such continuing effects from current or evolving strains of COVID-19 on future revenues, expenses or changes in accounting judgments that have had or are reasonably likely to have a material effect on our financial statements is limited, depending, as they do, on the severity and length thereof; as well as any further government actions and/or regulatory changes intended to address such effects.
Note 3. – Discontinued Operations
All of the businesses discussed below are reported as discontinued operations and the condensed consolidated financial statements for all prior periods have been adjusted to reflect this presentation.
Sale of Trace Regional Hospital, medical office building and three patient clinics, Trace Extended Care operations –On January 22, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. (“Southern”), reached a revised agreement for the sale of Trace Regional Hospital, a medical office building and three (3) patient clinics in Chickasaw County, MS, (collectively “Trace”) to Progressive Health of Houston, LLC (“Progressive”). Pursuant to those agreements, Southern sold certain personal and intangible property of Trace Regional Hospital and associated clinics to Progressive on January 22, 2024 for $
Sold Hospitals and Nursing Home– Subsidiaries of the Company have sold substantially all the assets of five (5) hospitals (“Sold Facilities”) during the period July 2, 2012 to March 17, 2019. The loss before income taxes of the Sold Facilities results primarily from the effects of retained professional liability insurance and claims expenses and settlement of a lawsuit.
Life Sciences and Engineering Segment —SunLink retained a defined benefit retirement plan which covered substantially all the employees of this segment when the segment was sold in fiscal year 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and
7
related tax benefit or expense is reflected in the results of discontinued operations for this segment for the three and nine months ended March 31, 2024 and 2023, respectively.
The components of pension expense for the three and nine months ended March 31, 2024 and 2023, respectively, were as follows:
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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2024 |
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2023 |
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2024 |
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2023 |
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Interest cost |
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$ |
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$ |
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$ |
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$ |
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Expected return on assets |
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( |
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( |
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( |
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Amortization of prior service cost |
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Net pension expense |
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$ |
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$ |
|
|
$ |
|
|
$ |
|
||||
SunLink contributed $
Details of statements of operations from discontinued operations for the three and nine months ended March 31, 2024 and 2023, primarily reflecting the reporting of Trace as discontinued operations as a result of the Company's January 22, 2024 revised agreement to sell Trace and its plan to sell Trace Extended Care, are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||
|
|
March 31, |
|
|
March 31, |
|
||||||||||||
|
|
2024 |
|
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|||||
Net Revenues |
|
$ |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Salaries, wages and benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Supplies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchased services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Other operating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Rent and lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Profit (Loss) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
||
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Losses on sale of assets |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|||
Federal stimulus - Provider relief funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss from Discontinued Operations before income taxes |
|
|
( |
) |
|
— |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Impairment loss of Trace Assets and related sale expenses before income taxes |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Loss from Discontinued Operations before income taxes |
|
|
( |
) |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income Tax Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss from Discontinued Operations, net of tax |
|
$ |
( |
) |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Details of assets and liabilities held for sale at March 31, 2024 and June 30, 2023, which primarily reflect the Trace Extended Care's assets to be sold and liabilities to be assumed as a result of the Company's January 22, 2024 revised agreement to sell the Trace hospital assets and its plans to dispose of Trace Extended Care are as follows:
8
|
|
March 31, |
|
|
June 30, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Receivables - net |
|
$ |
|
|
$ |
|
||
Inventory |
|
|
|
|
|
|
||
Prepaid expense and other assets |
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
|
|
|
|
|
||
Impairment reserve |
|
|
( |
) |
|
|
|
|
Right of use assets |
|
|
|
|
|
|
||
Noncurrent assets |
|
|
|
|
|
|
||
Total assets held for sale |
|
$ |
|
|
$ |
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued payroll and related taxes |
|
|
|
|
|
|
||
Current operating lease liabilities |
|
|
|
|
|
|
||
Other accrued expenses |
|
|
|
|
|
|
||
Long-term operating lease liabilities |
|
|
|
|
|
|
||
Total liabilities held for sale |
|
$ |
|
|
$ |
|
||
Note 4. – Shareholders’ Equity
Stock-Based Compensation – For the three and nine months ended March 31, 2024 and 2023, the Company recognized
Note 5. – Revenue and Accounts Receivable
Revenues by payor were as follows for the three and nine months ended March 31, 2002 and 2023:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
March 31, |
|
|
March 31, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Medicare |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Medicaid |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Retail and Institutional Pharmacy |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Managed Care & Other Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Self-pay |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Net Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The revenues for the three months ended March 31, 2024 includes $
Accounts Receivable and Allowance for Doubtful Accounts
The Company adopted Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 326, Financial Statements – Credit Losses (“Topic 326”) with an adoption date of July 1, 2023. This standard requires a financial asset (or a group of financial assets) measured at amortized cost basis, to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial assets. The Company evaluates the valuation of accounts receivable concessions allowances based upon its historical collection trends, as well as its understanding of the nature and collectability of accounts based on their age and other
9
factors. The model is based on the credit losses expected to arise over the life of the asset based on the Company’s expectations as of the balance sheet date through analyzing historical customer data as well as taking into consideration current and estimated future economic trends. The Company adopted Topic 326 and determined it did not have a material financial impact.
June 30, 2023 balance |
|
$ |
|
|
Concession allowance expense |
|
|
|
|
Write-offs |
|
|
( |
) |
September 30, 2023 balance |
|
|
|
|
Concession allowance expense |
|
|
|
|
Write-offs |
|
|
( |
) |
December 31, 2023 balance |
|
|
|
|
Concession allowance expense |
|
|
|
|
Write-offs |
|
|
( |
) |
March 31, 2024 balance |
|
$ |
|
Note 6. – Intangible Assets
As of March 31, 2024 and June 30, 2023, intangible assets consist solely of an indefinite-lived trade name of $
Amortization expense was $
Note 7. – Long-Term Debt
Long-term debt of discontinued operations which is included in current liabilities held for sale consisted of the following:
|
|
March 31, 2024 |
|
|
June 30, 2023 |
|
||
Finance Lease Obligations |
|
$ |
|
|
$ |
|
||
Less current maturities |
|
|
|
|
|
( |
) |
|
Long-term Debt |
|
$ |
|
|
$ |
|
||
Note 8. – Income Taxes
Income tax benefit of $
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
10
and the tax basis of the assets become deductible. The value of our deferred tax assets will depend on applicable income tax rates.
At March 31, 2024, 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 $
The principal negative evidence that led us to determine at March 31, 2024 that all the deferred tax assets should have full valuation allowances was historical tax losses and the projected current fiscal year tax loss. For purposes of evaluating our valuations allowances, the Company’s history of losses represent significant historical negative evidence and we have recognized none of our federal income tax net operating loss carry-forward of approximately $
For federal income tax purposes, at March 31, 2024, the Company had approximately $
Note 9. – Leases
The Company, as lessee, has operating leases relating to its pharmacy operations, certain medical equipment, and office equipment. All lease agreements generally require the Company to pay maintenance, repairs, property taxes and insurance costs, all of 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.
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||||
Lease Cost |
|
March 31, 2024 |
|
|
March 31, 2023 |
|
|
March 31, 2024 |
|
|
March 31, 2023 |
|
||||
Operating lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Short-term rent expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Variable lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
11
Supplemental balance sheet information relating to leases was as follows:
|
|
|
|
As of |
|
As of |
|
||
|
|
|
|
March 31, |
|
June 30, |
|
||
|
|
|
|
2024 |
|
2023 |
|
||
Operating Leases: |
|
Balance Sheet Classifications |
|
|
|
|
|
||
Operating lease ROU Assets |
|
ROU Assets |
|
$ |
|
$ |
|
||
Current operating lease liabilities |
|
Current operating lease liabilities |
|
|
|
|
|
||
Long-term operating lease liabilities |
|
Long-term operating lease liabilities |
|
$ |
|
$ |
|
||
Supplemental cash flow and other information related to leases as of and for the three and nine months ended March 31, 2024 and 2023 are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Other information |
|
March 31, 2024 |
|
|
March 31, 2023 |
|
|
March 31, 2024 |
|
|
March 31, 2023 |
|
||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating cash flows of operating leases |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average remaining lease term: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating leases |
|
|
|
|
|
|
|
|
||||||||
Weighted-average discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating leases |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Commitments relating to non-cancellable operating leases as of March 31, 2024 for each of the next five years and thereafter are as follows:
Payments due within |
|
Operating Leases |
|
|
|
1 year |
|
$ |
|
|
|
2 years |
|
|
|
|
|
3 years |
|
|
|
|
|
4 years |
|
|
|
|
|
5 years |
|
|
|
|
|
Over 5 years |
|
|
|
|
|
Total minimum future payments |
|
|
|
|
|
Less: Imputed interest |
|
|
( |
) |
|
Total liabilities |
|
|
|
|
|
Less: Current portion |
|
|
( |
) |
|
Long-term liabilities |
|
$ |
|
|
|
Note 10. – Sales Tax Payable
During the fiscal year ended June 30, 2019, the Pharmacy segment business amended its sales tax position with four different taxing authorities to avail its business of exemptions from state and local sales taxes in Louisiana on revenues from the sales of products and services to beneficiaries of government insurance programs to the extent reimbursed by the administrators of such programs. No such sales taxes for any period subsequent to June 30, 2019 have been paid on the related reimbursement received from the government insurance payers’ programs with respect to sales of such products and services. The Company has filed amended sales tax returns for periods still open under the applicable statutes of limitations claiming refunds of such sales taxes paid. Refunds have been received from
12
31, 2024, the Company recorded a refund received of $
Note 11. – Commitments and Contingencies
The Company has no contractual obligations, commitments and contingencies related to outstanding debt and interest (excluding operating leases, see Note 9) at March 31, 2024.
Note 12. – Related Party Transactions
A director of the Company is senior counsel in a law firm which provides services to SunLink. The Company expensed an aggregate of $
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share and admissions data)
Forward-Looking Statements
This Quarterly Report and the documents that are incorporated by reference in this Quarterly Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as “may,” “believe,” “will,” “seeks to”, “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on the current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. Throughout this annual report and the notes to the condensed 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
Operational Factors
14
Liabilities, Claims, Obligations and Other Matters
15
Regulation and Governmental Activity
Dispositions, Acquisition and Renovation Related Matters
The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could be additional factors besides those listed herein that also could affect SunLink in an adverse manner. You should read this Quarterly Report completely and with the understanding that future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Quarterly Report or our other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of SunLink.
We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information
16
on which the forward-looking statement is based, except as required by applicable law. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the other risk factors set forth elsewhere in this report.
Business Strategy: Operations, Dispositions and Acquisitions
The Board of Directors of SunLink believes Management should, among other things: (i) actively pursue one or more extraordinary corporate transactions, any of which transactions may involve (a) a merger or consolidation with a compatible third party, as a result of which the Company may not be in the majority or (b) a sale or other disposition of non-performing assets, and (ii) continue its efforts to improve its operations and services generally and achieve and maintain profitability in its existing Pharmacy business, which may include selective acquisitions, subject to available capital, (iii) pursue dispositions of underperforming subsidiaries or facilities and, (iv) effect corporate governance changes which were approved at the Special Meeting of Shareholders held on October 19, 2023, which approved reincorporation in Georgia with governing documents which provide for majority shareholder voting to better enable the Company to pursue any such extraordinary corporate transaction which may be judged favorable to the Company and its shareholders.
On January 22, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. (“Southern”), reached revised agreements for the sale of Trace Regional Hospital, a vacant medical office building and three (3) patient clinics in Chickasaw County, MS, (collectively “Trace”) to Progressive Health of Houston, LLC (“Progressive”) pursuant to which Southern sold certain personal and intangible property to Progressive for $500 under to an asset purchase agreement ('Trace Assets Sale"), entered into a six-month net lease of certain hospital real property for $20 per month, and engaged Progressive under a management agreement to manage the operations of Trace pending receipt of certain regulatory approvals, which was received February 29, 2024. Southern also entered into a real estate purchase agreement with Progressive ("Trace Hospital Sale") whereby Progressive is to purchase certain real estate and improvements of Trace for $2,000 by July 31, 2024. Southern is in the process of marketing for sale the Trace Extended Care & Rehabilitation ("Trace Extended Care"), a skilled care nursing facility adjacent to the campus of Trace. Trace Extended Care, which Southern retains, is considered an asset held for sale at March 31, 2024. There can be no assurance any extraordinary corporate transaction, the Trace Hospital Sale or the sale of Trace Extended Care will be completed.
The Company expects to use existing cash primarily to sustain its operations, and to fund activities related to such extraordinary transactions when available and appropriate, and for other general corporate purposes. The Company believes certain portions of its businesses continue to under-perform and the Company periodically entertains overtures for the sale of one or more of its businesses when deemed appropriate, including to better position the company for an extraordinary corporate business transaction such as a merger or consolidation.
In connection with a Special Meeting of Shareholders to reincorporate in Georgia and approve majority voting, a total of 7,032 Series C Preferred Shares were issued, each entitled to one million (1,000,000) votes and in turn each Series C Fractional Interest in such a Series C Preferred Share was issued for each Common Share of the Company and accordingly was entitled to one thousand (1,000) votes out of such one million votes of the corresponding Series C Preferred. Series C Fractional Interests could not be transferred separately from the Common Shares and were represented by the Common Shares. A further description of the Series C Preferred Shares and the Series C Fractional Interests and the terms and provisions thereof is set forth in the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2023. Each Common Share was entitled to one (1) vote as a Common Share and also one thousand (1,000) votes for the corresponding Series C Fractional Interest thereon, on each matter properly brought before the special shareholders’ meeting which was held on October 19, 2023 and at which shareholder approval of the Company's reincorporation from the state of Ohio to Georgia (the “Special Meeting”). The Series C Fractional Interests were automatically redeemed and the Series C Preferred Shares were cancelled.
There is no assurance that any strategic transaction will be authorized by the Company's Board of Directors or, if authorized, that any such transaction will be completed.
After Effects of COVID-19 Pandemic
17
The Company continued to experience adverse after-effects of the COVID-19 pandemic in the quarter ended March 31, 2024 and believes such effects will likely continue to affect its assets and operations in the foreseeable future particularly salaries and wages pressure, workforce shortages, supply chain disruption and broad inflationary pressures. Our ability to make estimates of any such continuing effects of evolving strains of COVID-19 on future revenues, expenses or changes in accounting judgments that have had or are reasonably likely to have a material effect on our financial statements is very limited, depending as they do on the severity and length thereof; as well as any further government actions and/or regulatory changes intended to address such effects.
Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made; and changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.
Our critical accounting estimates are more fully described in our 2023 Annual Report on Form 10-K and continue to include the following areas: receivables – net and provision for doubtful accounts; revenue recognition and net patient service revenues; goodwill, intangible assets and accounting for business combinations; professional and general liability claims; and accounting for income taxes. There have been no material changes in our critical accounting estimates for the periods presented other than amounts readily computable from the financial statements included in this form 10-Q.
Financial Summary
Results of Operations
The Company’s operations for the three and nine months ended March 31, 2024 continued to be negatively impacted by the effects of the aftermath of the COVID-19 pandemic, although mitigated somewhat from prior quarters, including among other factors, difficulty hiring qualified employees, rising labor and supply costs and supply chain challenges resulting in inability to obtain pharmacy and DME products on a timely, cost effective basis.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||
|
|
March 31, |
|
|
March 31, |
|
||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
||||||
Net Revenues |
|
$ |
7,462 |
|
|
$ |
8,181 |
|
|
|
(8.8 |
)% |
|
$ |
24,527 |
|
|
$ |
26,270 |
|
|
|
(6.6 |
)% |
Costs and expenses |
|
|
(8,334 |
) |
|
|
(8,648 |
) |
|
|
(3.6 |
)% |
|
|
(26,263 |
) |
|
|
(25,084 |
) |
|
|
4.7 |
% |
Operating profit (loss) |
|
|
(872 |
) |
|
|
(467 |
) |
|
|
86.7 |
% |
|
|
(1,736 |
) |
|
|
1,186 |
|
|
|
(246.4 |
)% |
Interest income (expense) - net |
|
|
19 |
|
|
|
8 |
|
|
|
137.5 |
% |
|
|
70 |
|
|
|
13 |
|
|
|
438.5 |
% |
Gain on sale of assets |
|
|
0 |
|
|
|
0 |
|
|
NA |
|
|
|
2 |
|
|
|
13 |
|
|
|
(84.6 |
)% |
|
Earnings (Loss) from continuing operations before income taxes |
|
$ |
(853 |
) |
|
$ |
(459 |
) |
|
|
85.8 |
% |
|
$ |
(1,664 |
) |
|
$ |
1,212 |
|
|
|
(237.3 |
)% |
18
Our net revenues are from two businesses, pharmacy and a subsidiary which provides information technology services to outside customers and SunLink subsidiaries. The Company’s revenues by payor were as follows for the three and nine months ended March 31, 2024 and 2023:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
March 31, |
|
|
March 31, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Medicare |
|
$ |
3,207 |
|
|
$ |
3,521 |
|
|
$ |
11,021 |
|
|
$ |
10,377 |
|
Medicaid |
|
|
1,506 |
|
|
|
1,802 |
|
|
|
4,898 |
|
|
|
5,048 |
|
Retail and Institutional Pharmacy |
|
|
1,517 |
|
|
|
1,632 |
|
|
|
4,839 |
|
|
|
5,666 |
|
Managed Care & Other Insurance |
|
|
1,022 |
|
|
|
1,032 |
|
|
|
3,179 |
|
|
|
4,572 |
|
Self-pay |
|
|
189 |
|
|
|
180 |
|
|
|
532 |
|
|
|
564 |
|
Other |
|
|
21 |
|
|
|
14 |
|
|
|
58 |
|
|
|
43 |
|
Total Net Revenues |
|
$ |
7,462 |
|
|
$ |
8,181 |
|
|
$ |
24,527 |
|
|
$ |
26,270 |
|
Pharmacy net revenues for the three month period ended March 31, 2024 decreased $729 or 9% from the three month period ended March 31, 2023 and decreased $1,711 or 7% from the nine month period ended March 31, 2024 from the nine month period ended March 31, 2023. The revenues for the three months ended March 31, 2024 include $57 of prior period sales tax refunds and the revenues for the nine months ended March 31, 2024 include $437 of prior period sales tax refunds. The decreased net revenues this year results primarily from the recognition of prior periods' accrued sales tax of $2,615 in the nine months ended March 31, 2023. The decrease in Pharmacy net revenues for the three months period ended March 31, 2024 compared to the same period last fiscal year resulted from lower retail pharmacy scripts filled and durable medical equipment ("DME") orders shipped. The decrease in Pharmacy net revenues for the nine months period ended March 31, 2024 compared to the same period last fiscal year resulted primary from the $2,615 recognition of prior periods accrued sales compare to $437 in prior periods sales tax refunds received this fiscal year.
Costs and expenses, including depreciation and amortization, were $8,334 and $8,648 for the three months ended March 31, 2024 and 2023, respectively. Costs and expenses, including depreciation and amortization, were $26,263 and $25,084 for the nine months ended March 31, 2024 and 2023, respectively.
|
|
Cost and Expenses |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
March 31, |
|
|
March 31, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Cost of goods sold |
|
|
58.2 |
% |
|
|
58.1 |
% |
|
|
56.5 |
% |
|
|
51.9 |
% |
Salaries, wages and benefits |
|
|
35.5 |
% |
|
|
31.1 |
% |
|
|
32.4 |
% |
|
|
28.7 |
% |
Supplies |
|
|
0.5 |
% |
|
|
0.8 |
% |
|
|
0.4 |
% |
|
|
0.4 |
% |
Purchased services |
|
|
3.6 |
% |
|
|
3.7 |
% |
|
|
3.4 |
% |
|
|
3.0 |
% |
Other operating expenses |
|
|
7.9 |
% |
|
|
7.4 |
% |
|
|
9.3 |
% |
|
|
7.1 |
% |
Rent and lease expense |
|
|
1.2 |
% |
|
|
1.1 |
% |
|
|
1.1 |
% |
|
|
1.1 |
% |
Depreciation and amortization expense |
|
|
4.6 |
% |
|
|
3.9 |
% |
|
|
3.9 |
% |
|
|
3.3 |
% |
19
Almost all categories of costs and expenses increased as a percent of net revenues in the three and nine months ended March 31, 2024 compared to the prior fiscal year due to the decreased net revenues this year and revenues last year which included the sales tax recognition of $2,615, and due to the corporate overhead costs this year of a public company in relation to the Company's smaller size. Cost of goods sold increased in total due to higher cost of certain pharmaceuticals and DME products which resulted from supply chain issues. Salaries, wages and benefits ("SWB")increased in total for the three and nine months ended March 31, 2024 compared to the prior period last year due to higher salaries and wages required in connection with current labor markets and operating challenges of labor allocation relating to the pandemic effects, including the use of contract labor. Other operating expenses for the nine months ending March 31, 2024 increased from the prior year's comparable period primarily due to increased legal expenses relating to the change in state of incorporation from Ohio to Georgia, which was finalized in October 2023. Depreciation expense also increased this year due to the $1,337 of pharmacy capital expenditures last fiscal year.
Operating Profit (Loss)
The Company reported an operating loss of $853 for the three months period ended March 31, 2024 compared to an operating loss of $467 for the three months period ended March 31, 2023. The increased operating loss for the three months ended March 31, 2024 compared to the three months period ended March 31, 2023 resulted from the 9% decrease in net revenues this quarter and increased costs as a percentage of net revenues. The Company reported an operating loss of $1,736 for the nine months period ended March 31, 2024 compared to an operating profit of $1,186 for the nine months period ended March 31, 2023. The $2.922 increased operating loss for the nine months ended March 31, 2024 compared to the nine months period ended March 31, 2023 resulted primarily from the 7% decrease in net revenues during the current nine month period and increased costs as a percentage of net revenues.
Income Taxes
Income tax benefit of $10 was recorded for continuing operations for the three months ended March 31, 2024. Income tax benefit of $6 (all state income benefit) was recorded for continuing operations for the three months ended March 31, 2023. Income tax benefit of $5 (all state income taxes) was recorded for continuing operations for the nine months ended March 31, 2024. Income tax benefit of $7 (all state income benefit) for continuing operations for the nine months ended March 31, 2023.
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 March 31, 2024, 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 $9,499 against the deferred tax asset so that there is no net long-term deferred income tax asset at March 31, 2024. 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. A long-term deferred tax liability of $69 is recorded within other noncurrent liabilities in the accompanying condensed consolidated balance sheet of March 31, 2024 to reflect the deferred tax liability for the non-amortizing trade name intangible asset.
The principal negative evidence that led us to determine at March 31, 2024 that all the deferred tax assets should have full valuation allowances was historical tax losses and the projected current fiscal year tax loss. For purposes of evaluating our valuations allowances, the Company’s history of losses represent significant historical negative
20
evidence and we have recognized none of our federal income tax net operating loss carry-forward of approximately $29,862
For federal income tax purposes, at March 31, 2024, the Company had approximately $29,862 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 year 2023 through fiscal year 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, 2020 are no longer subject to potential federal and state income tax examination. Net operating loss carry-forwards generated in tax years prior to June 30, 2020 are still subject to redetermination in potential federal income tax examination.
Loss from Discontinued Operations after Income Taxes
The loss from discontinued operations after income taxes was $572 for the three month period ended March 31, 2024 compared to a loss from discontinued operations after income taxes of $309 for the three month period ended March 31, 2023. The increased loss this year included a loss of $613 on the sale of Trace Hospital Sale which included $103 for sale transaction costs. The loss from discontinued operations after income taxes was $4,156 for the nine month period ended March 31, 2024 compared to a loss from discontinued operations after income taxes of $1,588 for the nine month period ended March 31, 2023.
Discontinued Operations
All of the businesses discussed below are reported as discontinued operations and the condensed consolidated financial statements for all prior periods have been adjusted to reflect this presentation.
Sale of Trace Regional Hospital, medical office building and three patient clinics, Trace Extended Care operations
On January 22, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. (“Southern”), reached a revised agreement for the sale of Trace Regional Hospital, a vacant medical office building and three (3) patient clinics in Chickasaw County, MS, (collectively “Trace”) to Progressive Health of Houston, LLC (“Progressive”). Pursuant to those agreements, Southern sold certain personal and intangible property to Progressive on January 22, 2024 for $500 pursuant to an asset purchase agreement ('Trace Assets Sale"), entered into a six-month net lease of certain hospital real property for $20 per month, and engaged Progressive under a management agreement to manage the operations of Trace pending receipt of certain regulatory approvals, which was received February 29, 2024. As a result of the transaction, Southern’s previous agreement with Progressive dated November 10, 2023, was terminated. Southern also entered into a real estate purchase agreement with Progressive ("Trace Hospital Sale") whereunder Progressive is to purchase certain real estate and improvements of Trace for $2,000 by July 31, 2024. As a result of the transactions ("Revised Agreement"), SunLink reported an impairment loss of $1,974 at December 31, 2023 to reduce the net value of the Trace hospital assets to the sale proceeds under the revised agreement and reported $58 of transaction expenses for the Revised Agreement during the quarter ended December 31, 2023. An impairment reserve of $$1,695 remains at March 31, 2024 for the Trace Hospital Sale assets. During the quarter ended March 31, 2024, SunLink reported an additional loss on the sale of the Trace Hospital Sale of $613 and reported as additional $55 of transactions expenses. Southern is in the process of marketing the Trace Extended Care & Rehabilitation ("Trace Extended Care"), a skilled care nursing facility adjacent to the campus of Trace. Trace Extended Care, which Southern retains, is considered an asset held for sale at March 31, 2024. Southern is in the process of marketing for sale Trace Extended Care, which Southern retains. There can be no assurance that the Trace Real Estate purchase will be completed or that Trace Extended Care will be sold.
Sold Hospitals and Nursing Home – Subsidiaries of the Company have sold substantially all the assets of five rural hospitals (“Sold Facilities”) during the period July 2, 2012 to March 17, 2019. The loss before income taxes of the Sold Facilities results primarily from the effects of retained professional liability insurance and claims expenses and settlement of a lawsuit.
21
Net Loss
Net loss for the three months period ended March 31, 2024 was $1,396 (or a loss of $0.20 per fully diluted share) as compared to a net loss of $762 (or $0.11 per fully diluted share) for the three months period ended March 31, 2023. Net loss for the nine months period ended March 31, 2024 was $5,815 (or a loss of $0.83 per fully diluted share) as compared to a net loss of $369 (or $0.05 per fully diluted share) for the nine months period ended March 31, 2023.
Liquidity and Capital Resources
Overview
The Company and its subsidiaries' primary source of liquidity for working capital and operational needs, to pursue extraordinary corporate transactions and for general corporate purposes, is unrestricted cash on hand, which was $1,211 at March 31, 2024, and the sale of assets. From time-to-time, we may, nevertheless, seek to obtain financing for the liquidity needs of the Company or individual subsidiaries
CARES Act Funds - The CARES Act was enacted by the U.S. government on March 27, 2020 provided the relief to health care providers under the CARES Act in the form of grants under PRF and forgivable loans under PPP. We received a total of $9,416 under the CARES Act programs consisting of $6,182 in general and targeted PRF and $3,234 of PPP loans. During the first two calendar quarters of 2021, the Company became eligible for, and we applied for $3,586 of ERC through amended quarterly payroll tax filings, all of which the Company has received as of the date of this filing.
Subject to the effects, risks and uncertainties associated with the aftermath of the COVID-19 pandemic and our ability to retain the CARES funds described above, as well as our ability to complete the disposition of certain unprofitable operations, including the Trace transaction, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months.
Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to outstanding debt, noncancelable operating leases and interest on outstanding debt from continuing operations at March 31, 2024 were as follows:
Payments |
|
|
|
|
Operating |
|
|
|
1 year |
|
|
|
|
$ |
337 |
|
|
2 years |
|
|
|
|
|
252 |
|
|
3 years |
|
|
|
|
|
15 |
|
|
4 years |
|
|
|
|
|
10 |
|
|
5 years |
|
|
|
|
|
0 |
|
|
Over 5 years |
|
|
|
|
|
0 |
|
|
|
|
|
|
|
$ |
614 |
|
|
As of March 31, 2024, we had no outstanding debt.
The Company currently expects to purchase approximately $800 of capitalizable DME by the Pharmacy segment (to be rented to customers) during the next twelve months. The timing and actual amount which will be expended is difficult to predict due to various factors including varying demand for such equipment as well as its availability given current supply sourcing challenges. Other capital expenditures for replacement and upgrade of current facilities and equipment of the Pharmacy business may be needed during the next twelve months although there is no estimate of those expenditures other than being expected to be at a lower level than fiscal years 2023 and 2022. The Company anticipates funding such expenditures primarily from cash on hand. Other cash expenditures for the next twelve months currently are expected to be in-line with expenditures for the nine months ended March 31, 2024, subject to further operating and administrative cost increases, and other settlements of cost reports and other liabilities in the ordinary course of business as well as cash receipts and disbursements relating to possible asset sales, and, additionally, the Company’s ability to retain unrecognized CARES Act grants, PPP funds and ERC funds received or previously received. Other than reported above, there have been no material changes outside the ordinary course of business relating to our upcoming cash obligations which have occurred during the three months ended March 31, 2024. Other than with
22
respect to scheduled cash expenditures (based on current operating levels) for long-term debt, operating leases, and the specific items previously disclosed here, as well as continued uncertainties relating to the aftermath of the COVID-19 pandemic and asset sales, the Company is currently unaware of other trends or unusual uncertainties that are likely to cause a material change in its cash expenditures in periods beyond the next twelve months. See Notes 7, 9, 10, and 11 to our financial statements. The Company is also unaware of events that are reasonably likely to cause a material change in the relationship between its costs and revenues (such as known or reasonably likely future increases in costs of labor or materials, price increases or inventory adjustments, beyond those discussed herein); however, we are unable to predict with any degree of accuracy when, or the extent to which, recent inflationary price trends, labor disruptions and supply chain challenges experienced in 2021, 2022 and 2023 to date will mitigate.
Related Party Transactions
A director of the Company is senior counsel in a law firm which provides services to SunLink. The Company expensed an aggregate of $96 and $35 for legal services to this law firm in the three months ended March 31, 2024 and 2023, respectively and expensed an aggregate of $385 and $220 for legal services to this law firm in the nine months ended March 31, 2024 and 2023, respectively. Included in the Company’s condensed consolidated balance sheets at March 31, 2024 and June 30, 2023 is outstanding legal expenses to this firm $154 and $36, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments (such as investments and borrowings) and interest rate risk is not material.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 and Rule 15d-15(e) 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) and the changes in our disclosure controls and procedures during the quarter. Under the direction of our chief executive officer and chief 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 March 31, 2024
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 Quarterly Report on Form 10-Q, 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 the preparation of this Form 10-Q, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2024. The effect, if any, of the COVID-19 pandemic on the effectiveness of current disclosure controls and procedures in future periods is uncertain and we intend to revise the same, if any, and to the extent deemed appropriate.
Changes in Internal Control Over Financial Reporting
There were no changes during the quarter ended March 31, 2024 in our internal control over financial reporting that materially affected, or is believed likely to materially affect, our internal controls over financial reporting. Notwithstanding staff absences and turnover and challenges hiring new and replacement staff, including in our financial departments, to date, we do not believe the COVID-19 pandemic has had any material effect on the effectiveness of our
23
disclosure controls and procedures, however we cannot assure you that our internal controls will not be affected in the case of other or recurrent pandemics.
24
PART II. OTHER INFORMATION
Items required under Part II not specifically shown below are not applicable.
ITEM 1. 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 other 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 any current pending legal proceedings 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 legal proceedings, an adverse outcome could be material to our results of operations or cash flows in any reporting period.
ITEM 1A. RISK FACTORS
Risk Factors Relating to an Investment in SunLink
Information regarding risk factors appears in “MD&A – Forward-Looking Statements,” in Part I – Item 2 of this Form 10-Q and in “MD&A - Risks Factors Relating to an Investment in SunLink” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2023. We believe there have been no material changes from the risk factors previously disclosed in such Annual Report except as set forth herein.
In addition to the matters set forth herein, the reader should carefully consider, in addition to the other information set forth in this report, the risk factors discussed in our Annual Report that could materially affect our business, financial condition or future results. Such risk factors are expressly incorporated herein by reference. The risks described in our Annual Report are not the only risks facing our Company. In addition to risks and uncertainties inherent in forward-looking statements contained in this Report on Form 10-Q, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Whenever we refer to “SunLink,” “Company”, “we," "our,” or “us” in this Item 1A, we mean SunLink Health Systems, Inc. and its subsidiaries, unless the context suggests otherwise.
ITEM 6. EXHIBITS
Exhibits:
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101 |
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended March 31, 2024, formatted in iXBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and June 30, 2023, (ii) Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) for the three and nine months ended March 31, 2024 and 2023 (unaudited), (iii) Condensed Consolidated Statements of Cash Flows for the three and nine months ended March 31, 2024 and 2022 (unaudited), and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text. |
|
|
|
25
104 |
|
Cover Page Interactive Data File (formatted as Inline XRBL with the applicable taxonomy extension information in Exhibit 101.) |
26
SIGNATURES
Pursuant to the requirements 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.
|
|
|
SunLink Health Systems, Inc. |
||
|
|
|
By: |
/s/ Mark J. Stockslager |
|
|
Mark J. Stockslager |
|
|
Chief Financial Officer |
|
Dated: May 15, 2024
27