SUNLINK HEALTH SYSTEMS, INC. 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 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 thatSunLink Health Systems, Inc. or any particular subsidiary ofSunLink Health Systems, Inc. owns or operates any asset, business, or property. Healthcare services, pharmacy operations and other businesses described in this filing are owned and operated by distinct and indirect subsidiaries ofSunLink Health System, Inc. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors that could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance, and achievements to differ materially from those anticipated, include, but are not limited to:
General Business Conditions
• general economic and business conditions in the
in the states in which we operate;
• the effects of the coronavirus ("COVID-19") pandemic, both nationwide and
in the states in which we operate, including among other things, on demand
for our 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 large number of unvaccinated persons and plateaued or
stagnant vacation and booster rates in
primary states in which we conduct healthcare operations. Future COVID-19
or other pandemics of other contagious diseases could result in the
unavailability of personnel to provide services, regulatory bans on
certain services or admissions, decreased occupancy levels, increase
costs, reduce our revenues and otherwise adversely affect our business;
• increases in uninsured and/or underinsured patients due to COVID-19,
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
rehabilitation center, nursing home, and pharmacy businesses;
• demographic characteristics and changes in areas where we operate,
including resistance to vaccination for COVID-19;
• any new variants or subvariants of the COVID-19 virus and other SARS-COV-2
viruses and other infectious diseases;
• the availability of cash or borrowings to fund working capital,
renovations, replacements, expansions, and capital improvements atexisting healthcare and pharmacy facilities and for acquisitions and
replacement of such facilities;
• changes in accounting principles generally accepted in the U.S. ; and
• fluctuations in the market value of equity securities including SunLink
common shares, including fluctuations based on fears of actual inflation
or recession.
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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;
• 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 of forgiveness requirements;
• the ability to achieve compliance with requirements of the expenditure and
retention of PRF funds;
• the ability or inability to fund our obligations under capital leases or
new or existing obligations and/or any existing or potential defaults
under existing indebtedness;
• restrictions imposed by existing or future contractual obligations
including existing or any new 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 governmental authorities, 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
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;
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• claims for medical malpractice 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 failure currently unknown to us of 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
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; indigent care and other reimbursements (Medicare
Upper Payment Limit "UPL" and Disproportionate Share Hospital "DSH"
adjustments) and governmental assessments for such programs;
• 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, underperforming
business segments and surplus assets;
• the availability of cash and the terms of capital to fund acquisitions or
replacement facilities, improvements or renovations to existing facilities
or both; and
• competition in the market for acquisitions of hospitals, rehabilitation
centers, nursing homes, pharmacy facilities, and other healthcare
businesses.
The foregoing are significant factors we think could cause our actual results to
differ materially from expected results. However, there could be additional
factors besides those listed herein that also could affect SunLink in an adverse
manner. You should read this Quarterly Report completely and with the
understanding that actual future results may be materially different from what
we expect. You are cautioned not to unduly rely on forward-looking statements
when evaluating the information presented in this Quarterly Report or our other
disclosures because current plans, anticipated actions, and future financial
conditions and results may differ from those expressed in any forward-looking
statements made by or on behalf of SunLink.
We have not undertaken any obligation to publicly update or revise any
forward-looking statements. All of our forward-looking statements speak only as
of the date of the document in which they are made or, if a date is specified,
as of such date. We disclaim any obligation or undertaking to provide any
updates or revisions to any forward-looking statement to reflect any change in
our expectations or any changes in events, conditions, circumstances or
information on which the forward-looking statement is based, except as required
by applicable law. All subsequent written and
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oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the foregoing factors and
the other risk factors set forth elsewhere in this report and/or in our Annual
Report on Form 10-K.
Business Strategy: Operations, Dispositions and Acquisitions
The business strategy of SunLink is to focus its efforts on improving the operations, services and profitability of its existing Healthcare Services and Pharmacy businesses. While the Company intends primarily to pursue its business strategy of improving its operations, services and profitability of its existing businesses, subject to available capital and other resources, the Company also intends to pursue growth by selective acquisitions in the healthcare and pharmacy segments. We believe, however, 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 the COVID-19 is novel in nature, uncertain in duration, and materially affected by government actions related to the pandemic. In response to the pandemic, the Company has discontinued certain services, laid off or furloughed employees where necessary, reduced cash outlays where practicable, 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 existing COVID-19 pandemic, the end thereof, potential new COVID-19 or other pandemics, and government actions in response thereto. The Company expects to use existing cash primarily to sustain it operations in response to the continuing impact of the COVID-19 pandemic, for growth initiatives, including acquisitions, when available and appropriate, and for other general corporate purposes. There is no assurance that any acquisitions or dispositions of assets will be authorized by the Company's Board of Directors or, if authorized, that any such transactions will be completed. Although the Company believes certain portions of its businesses continue to under-perform, the Company is not currently offering any of its businesses for sale.
COVID-19 Pandemic and CARES Act Funding
COVID-19 was declared a global pandemic by theWorld Health Organization onMarch 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 have been subject to frequent changes and at times have been 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. We believe the effect of the COVID-19 pandemic and certain public and certain governmental responses to it have negatively affected our last nine quarter's results. In lateDecember 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. The Company and its subsidiaries are currently developing and will implement plans to vaccinate employees to the extent required by the final rules issued by CMS. The Company believes the vaccine mandates resulted in the loss of staff, including clinical staff, and together with the current state of the labor market, have negatively affected the Company's ability to maintain the current levels of service. In our Healthcare businesses, we have experienced material reductions in demand and net revenues due to the COVID-19 pandemic. There continues to be reduced current demand for certain hospital services, and for extended care, rehabilitation center and nursing home admissions, and clinic visits. The availability and cost of medical supplies have adversely affected our Healthcare businesses, and 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 which were previously furloughed, laid off or retired. 18 -------------------------------------------------------------------------------- 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 reduced capacity, and until these referral sources resume operating at full capacity, we believe the COVID-19 pandemic will continue to affect the demand for DME products andRetail and Institutional Pharmacy drugs and products. Reductions in employee hours have been made in response to the lower demand. Extended care facilities and rehabilitation centers, nursing homes and other customers of ourInstitutional Pharmacy services continue to be adversely affected by the COVID-19 pandemic. OurInstitutional 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 also has negatively affected our supply processes, especially with respect to access to respiratory equipment and certain personal protective equipment and cleaning products. Our Healthcare and Pharmacy segments have received approximately$6,173 in general and targeted Provider Relief Funds ("PRF") during the periodApril 1, 2020 throughMarch 31, 2022 under the CARES Act, which was enacted inMarch 2020 in response to the COVID-19 pandemic. The PRF distributions have been accounted for as government grants, and a total of$5,652 have been recognized since April l, 2020 as other income under the gain contingency recognition method. During the quarter endedJune 30, 2020 , our Healthcare and Pharmacy segments received$3,234 in Paycheck Protection Plan ("PPP") loans provided under the CARES Act. These loans were forgivable upon compliance with conditions specified under the PPP loan program. As ofMarch 31, 2022 , all our PPP loans have been forgiven. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enactedDecember 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 endingJune 30, 2021 . As a result of such legislation, the Company qualified for ERC for the first and second calendar quarters of 2021 due to the decrease in its gross receipts and has applied for ERC of$3,586 through amended quarterly payroll tax filings for the applicable quarters. Subsequent toMarch 31, 2022 through the date of this filing, the Company has received$1,747 of ERC applied for. We continue to monitor compliance with the terms and conditions of the ERC and PPP programs and developing interpretations and enforcement of the ERC and PPP program rules and the regulations. PRF distributions 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 the department of "HHS". We continue to monitor compliance with the terms and conditions of the PRF and developing interpretations and enforcement of PRF rules and regulations, as well as 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. The Company is unable to determine the extent to which the COVID-19 pandemic going forward 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, rehabilitation center, nursing home, clinics, and our 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. For additional discussion of the risks presented by continuing effects of the COVID-19 pandemic to our results, see Risk Factors in Part II, Item 1A of this Form 10-Q. 19
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Critical Accounting Estimates
The preparation of financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made; and changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition. Our critical accounting estimates are more fully described in our 2021 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
The Company's operations for the nine months ended
The results of continuing operations shown in the financial summary below are for our two business segments, Healthcare Services and Pharmacy.
Three Months Ended Nine Months Ended
March 31, March 31,
2022 2021 % Change 2022 2021 % Change
Net Revenues - Healthcare
Services $ 3,749 $ 3,286 14.1 % $ 10,582 $ 10,119 4.6 %
Net Revenues - Pharmacy 6,778 6,492 4.4 % 20,881 20,231 3.2 %
Total Net Revenues 10,527 9,778 7.7 % 31,463 30,350 3.7 %
Costs and expenses (11,591 ) (10,318 ) 12.3 % (34,592 ) (31,467 ) 9.9 %
Operating loss (1,064 ) (540 ) 97.0 % (3,129 ) (1,117 ) 180.1 %
Interest income (expense) - net (1 ) (7 ) (85.7 )% (18 ) (21 ) (14.3 )%
Federal stimulus - Provider
relief funds 106 11 863.6 % 720 3,459 (79.2 )%
Forgiveness of PPP loans and
accrued interest 0 0 NA 3,010 0 NA
Gain on sale of assets 0 1 (100.0 )% 12 14 (14.3 )%
Earnings (loss) from continuing
operations before income taxes $ (959 ) $ (535 ) NA $ 595 $ 2,335 (74.5 )%
Results of Operations
Our net revenues are from our two business segments, Healthcare Services and
Pharmacy. The Company's revenues by payor were as follows for the three and nine
months ended March 31, 2022 and 2021:
Three Months Ended Nine Months Ended
March 31, March 31,
2022 2021 2022 2021
Medicare $ 4,288 $ 4,220 $ 14,635 $ 13,468
Medicaid 2,745 2,658 7,812 7,8794,578
Managed Care & Other Insurance 1,257 1,203 3,651 3,924 Self-pay 718 120 821 341 Other 15 84 77 160 Total Net Revenues$ 10,527 $ 9,778 $ 31,463 $ 30,350 The Healthcare Services segment in the current year is composed of one hospital, one extended care and rehabilitation center and four clinics, a subsidiary which provides information technology services to outside 20 -------------------------------------------------------------------------------- customers and SunLink subsidiaries and two subsidiaries holding undeveloped real estate. Healthcare Services net revenues increased$463 , or 14%, for the three months period endedMarch 31, 2022 and increased$463 , or 5% for the nine months period endedMarch 31, 2022 compared to the prior year period. Increased revenues from increased hospital patient days and clinic visit increases were partially offset by decreases in revenues from extended care patient days. Pharmacy segment net revenues for the three months period endedMarch 31, 2022 increased$286 , or 4.4% from the three months period endedMarch 31, 2021 . Institutional pharmacy sales increased 13.3% for the three month period endedMarch 31, 2022 from the prior year period due to a 4.3% increase in per script net revenues and 10.5% increase in scripts filled. Retail pharmacy sales increased 4.8% for the three month period endedMarch 31, 2022 from the prior year period due to a 3.0% revenue per script filled and a 1.7% increase in retail pharmacy scripts filled. Durable Medical Equipment ("DME") sales decreased 5.7% for the three month period endedMarch 31, 2021 from the prior year period primarily due to lower net revenue per order filled. Pharmacy segment net revenues for the nine months period endedMarch 31, 2022 increased$650 , or 3.2% from the nine months period endedMarch 31, 2021 . Institutional pharmacy sales increased 7.3% for the nine month period endedMarch 31, 2022 from the prior year period due to a 6.8% increase in per script net revenues. Durable Medical Equipment sales increased 0.7% for the nine month period ended March 31 2022 from the prior year period as orders increased this year, primarily due to higher respiratory equipment orders. Retail pharmacy sales decreased 0.1% for the nine month period endedMarch 31, 2022 from the prior year period due to lower revenue per script. Costs and expenses, including depreciation and amortization, were$11,591 and$10,318 for the three months endedMarch 31, 2022 and 2021, respectively. Costs and expenses, including depreciation and amortization, were$34,592 and$31,467 for the nine months endedMarch 31, 2022 and 2021, respectively. Cost and Expenses as a % of Net Revenues Three Months Ended Nine Months Ended March 31, March 31, 2022 2021 2022 2021 Cost of goods sold 38.8 % 37.7 % 38.7 % 38.5 % Salaries, wages and benefits 45.0 % 43.0 % 45.2 % 42.2 % Supplies 2.6 % 2.4 % 2.8 % 2.4 % Purchased services 9.2 % 5.7 % 8.3 % 6.1 % Other operating expenses 9.8 % 11.9 % 10.2 % 10.0 % Rent and lease expense 1.2 % 1.4 %
1.3 % 1.4 % Depreciation and amortization expense 3.7 % 3.5 % 3.4 % 3.2 %
Salaries, wages, and benefits increased as a percent of net revenues for the three and nine months period endedMarch 31, 2022 compared to same period last fiscal year due to higher salaries and wages required in connection with current labor market conditions, operating challenges of labor allocation relating to the pandemic, including contract labor, and higher employee health claims expenses. Supplies expenses increased this year due to higher purchase prices resulting from market demand and supply disruptions. Purchased services costs increased this year due to increased costs of fuel, the outsourcing at a Healthcare Services facility of certain services (due to challenges in hiring labor locally) and increased cost of software support services. Depreciation expense also increased as a percentage of net revenue this year due to the$2,436 of capital expenditures for the nine months endedMarch 31, 2022 and the$2,595 of capital expenditures last fiscal year.
Operating Profit (Loss)
The Company reported an operating loss of$1,064 for the three months period endedMarch 31, 2022 compared to an operating loss of$540 for the three month period endedMarch 31, 2020 . The Company reported an operating loss of$3,129 for the nine month period endedMarch 31, 2022 compared to an operating loss of$1,117 for the nine month period endedMarch 31, 2021 . Such operating loss for the three and nine month periods endedMarch 31, 2022 was primarily a result of higher operating costs not covered by the slightly higher revenues. 21
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Forgiveness of PPP loans and accrued interest
During the nine months ended March 31, 2022 , $2,972 of our PPP loans and
related $38 of accrued interest were forgiven by the SBA and $3,010 was recorded
as income relating to PPP loan forgiveness for the nine months ended March 31,
2022 .
Other Income - Federal Stimulus - Provider relief funds
As part of the CARES Act, two subsidiaries have received PRF payments. The
Company recognized
Interest Income (Expense) -Net
Interest expense, net, was$1 for the three months period endedMarch 31, 2022 compared to interest expense, net, of$7 for the three months period endedMarch 31, 2021 , respectively. Interest expense, net, was$18 for the nine months period endedMarch 31, 2022 compared to interest income, net, of$21 for the nine month period endedMarch 31, 2021 , respectively.
Income Taxes
Income tax benefit of$25 (all state taxes) and$62 (all state taxes) was recorded for continuing operations for the three months endedMarch 31, 2022 and 2021, respectively. No income tax expense and income tax benefit of$47 (all state taxes) was recorded for continuing operations for the nine months endedMarch 31, 2022 and 2021, respectively. Of the CARES Act provisions, currently, the most material income tax considerations related to the Company are related to the amounts for ERC and amounts received as general and targeted PRF. Based on the latest publishedIRS guidance as of the preparation of theMarch 31, 2022 financial statements, PRF (to the extent the applicable terms and conditions required to retain the funds are met "Retainable PRF") are fully includable in taxable income in the Company's tax returns in the fiscal year received. ERC are included in taxable income in the quarter which the payroll expenses for which the credits offset are deductible. ERC results in qualified wages being disallowed as a deduction for the portion of the wages paid equal to the sum of the payroll tax credit taken in the associated quarter. For amounts received and forgiven under the PPP loans, due to the enactment of the Consolidated Appropriations Act, 2021, onDecember 27, 2020 ,Congress specifically allows deduction of any expenses associated with forgiven PPP loan proceeds. It is the Company's assumption atMarch 31, 2022 that all PPP Loan associated expenses will be deductible for income tax. 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. AtMarch 31, 2022 , 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$7,348 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability atMarch 31, 2022 . 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. 22 -------------------------------------------------------------------------------- The principal negative evidence that led us to determine atMarch 31, 2022 that all the deferred tax assets should have full valuation allowances was the projected current fiscal year tax loss disregarding unusual items associated with the CARES Act discussed above, history of losses as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Services Segment businesses operate and the federal income tax net operating loss carry-forward of approximately$18,580 . For federal income tax purposes, atMarch 31, 2022 , the Company had approximately$18,580 of estimated net operating loss carry-forwards available for use in future years subject to the limitations of the provisions of Internal Revenue Code Section 382. These net operating loss carryforwards expire primarily in fiscal 2023 through fiscal 2038; however, with the enactment of the Tax Cut and Jobs Act onDecember 22, 2017 , federal net operating loss carryforwards generated in taxable years beginning afterDecember 31, 2017 now have no expiration date. The Company's returns for the periods prior to the fiscal year endedJune 30, 2018 are no longer subject to potential federal and state income tax examination.
Earnings (Loss) from Continuing Operations after Income Taxes
The loss from continuing operations after income tax was$934 for the three months endedMarch 31, 2022 as compared to a loss from continuing operations after income tax of$473 for the three months endedMarch 31, 2021 . Earnings from continuing operations after income tax was$595 for the nine months endedMarch 31, 2022 as compared to earnings from continuing operations after income tax of$2,382 for the nine months endedMarch 31, 2021 . The decreased earnings from continuing operations this year compared to the prior year was due to higher PRF income recognized last year partially offset by PPP loan forgiveness this year.
Loss from Discontinued Operations after Income Taxes
The loss from discontinued operations after income taxes was$56 for the three month period endedMarch 31, 2022 compared to a loss from discontinued operations after income taxes of$58 for the three months period endedMarch 31, 2021 . The loss from discontinued operations after income taxes was$239 for the nine month period endedMarch 31, 2022 compared to a loss from discontinued operations after income taxes of$179 for the nine month period endedMarch 31, 2021 . The increased loss from discontinued operations this year was due to a settlement of a workers' compensation claim remaining from a sold business.
Discontinued Operations
Sold Hospitals andNursing Homes - Subsidiaries of the Company have sold substantially all the assets of four hospitals and a nursing home ("Sold Facilities") during the periodJuly 2, 2012 toMarch 17, 2019 . The loss before income taxes on the Sold Facilities results primarily from the effects of retained professional liability insurance and claims expenses and settlement of a lawsuit. Life Sciences and Engineering Segment -SunLink retained a defined benefit retirement plan which covered substantially all of the employees of this segment when the segment was sold in fiscal 1998. EffectiveFebruary 28, 1997 , the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and related tax benefit or expense is reflected in the results of operations for this segment for the three and nine months endedMarch 31, 2022 and 2021, respectively.
Net Earnings (Loss)
Net loss for the three months period endedDecember 31, 2021 was$990 (a loss of$0.14 per fully diluted share) as compared to net loss of$531 (a loss of$0.08 per fully diluted share) for the three months period endedMarch 31, 2021 . Net earnings for the nine months period endedMarch 31, 2021 was$356 ($0.05 per fully diluted share) as compared to net earnings of$2,203 ($0.32 per fully diluted share) for the nine months period endedMarch 31, 2021 .
Liquidity and Capital Resources
Overview
Our primary source of liquidity is unrestricted cash on hand, which was$7,144 atMarch 31, 2022 . The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand. From time-to-time, we may, nevertheless, seek to obtain financing for the liquidity needs of the Company or individual subsidiaries based 23
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on anticipated need. However, currently, the Company's ability to raise capital (debt or equity) in the public or private markets on what it considers acceptable terms is uncertain.
CARES Act Funds - The CARES Act was enacted by theU.S. government onMarch 27, 2020 . Among the relief provided to health care providers under the CARES Act are grants under PRF and forgivable loans under PPP. We have received a total of$9,407 under the CARES Act programs consisting of$6,173 in general and targeted PRF and$3,234 of PPP loans. During the first two calendar quarters of 2021, the Company became eligible for, and we applied for$3,586 of ERC through amended quarterly payroll tax filings. Subject to the effects, risks and uncertainties associated with the COVID-19 pandemic and our ability to retain the CARES funds described above, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months.
Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to outstanding
debt, noncancelable operating leases and interest on outstanding debt from
continuing operations at
Interest on
Payments Long-Term Operating Outstanding
due within: Debt Leases Debt
1 year $ 39 $ 351 $ 3
2 years 25 336 1
3 years 0 322 0
4 years 0 245 0
5 years 0 10 0
Over 5 years 0 3 0
$ 64 $ 1,267 $ 4
As of
At March 31, 2022 , the Company has approximately $431 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. In addition to the $431 committed to the Trace Forward
Capital Plan, at March 31, 2022 , the Company also expects to purchase
approximately $238 of additional capitalizable DME by the Pharmacy segment (to
be rented to customers) through the end of fiscal 2022. The timing and actual
amount which will be expended is difficult to predict due to various factors
including varying demand for such equipment as well as its availability given
current supply sourcing challenges. The Company anticipates funding such
expenditures primarily from cash on hand. The Company has $3,586 receivable from
the filing of ERC claimed in amended payroll tax returns of which we have
collected $1,747 subsequent to March 31, 2022 through the date of this filing.
We expect to collect the remaining $1,839 receivable in the next 12 months.
Other cash expenditures for the next 12 months currently are expected to be
in-line with expenditures for the quarter ended March 31, 2022 , subject to
further operating and administrative cost increases, and other settlements of
cost reports in the ordinary course of business, and the Company's ability to
retain unrecognized CARES Act grants, PPP funds and ERC funds received or
previously received. Other than reported above, there have been no material
changes outside the ordinary course of business relating to our upcoming cash
obligations which have occurred during the nine months ended March 31, 2022 .
Other than with respect to scheduled cash expenditures (based on current
operating levels) for long-term debt, operating leases, and interest on current
outstanding debt, the debt, the specific items previously disclosed here, as
well as continued uncertainties relating to the continuing impact of the
COVID-19 pandemic, the Company is currently unaware of other trends or unusual
uncertainties that are likely to cause a material change in its cash
expenditures in periods beyond the next twelve months. See Notes 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
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to predict with any degree of accuracy whether, or the extent to which, recent inflationary price trends in 2021 and 2022 are transitory or reflect the beginning of an inflationary cycle.
Related Party Transactions
A director of the Company is a member of a law firm which provides services to SunLink. The Company expensed an aggregate of$9 and$85 for legal services to this law firm in the three months endedMarch 31, 2022 and 2021, respectively. The Company expensed an aggregate of$120 and$156 for legal services to this law firm in the nine months endedMarch 31, 2022 and 2021, respectively. Included in the Company's condensed consolidated balance sheets atMarch 31, 2022 andJune 30, 2021 is$4 and$21 , respectively, of amounts payable to this law firm.
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