UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20172018
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number1-12607
SUNLINK HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Ohio | 31-0621189 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
900 Circle 75 Parkway, Suite 1120, Atlanta, Georgia 30339
(Address of principal executive offices)
(Zip Code)
(770)933-7000
(Registrant’s telephone number, including area code)
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter during the preceding 12 months (of for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
The number of Common Shares, without par value, outstanding as of May 11, 20172018 was 9,162,608.7,416,814.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 1. | FINANCIAL STATEMENTS |
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, | ||||||||||||||||
2017 | June 30, | |||||||||||||||
(unaudited) | 2016 | March 31, 2018 (unaudited) | June 30, 2017 | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 11,237 | $ | 3,261 | $ | 3,541 | $ | 10,494 | ||||||||
Restricted cash | 1,000 | 0 | 0 | 1,000 | ||||||||||||
Receivables - net | 6,300 | 6,166 | ||||||||||||||
Receivables – net | 5,884 | 5,906 | ||||||||||||||
Inventory | 2,171 | 2,612 | 1,974 | 2,159 | ||||||||||||
Deferred income tax asset | 0 | 624 | ||||||||||||||
Current assets held for sale | 0 | 2,461 | ||||||||||||||
Prepaid expense and other assets | 2,784 | 2,768 | 3,083 | 3,062 | ||||||||||||
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Total current assets | 23,492 | 17,892 | 14,482 | 22,621 | ||||||||||||
Property, plant and equipment, at cost | 31,669 | 33,914 | 30,103 | 28,609 | ||||||||||||
Less accumulated depreciation | 20,986 | 20,920 | 19,559 | 18,319 | ||||||||||||
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Property, plant and equipment - net | 10,683 | 12,994 | ||||||||||||||
Property, plant and equipment – net | 10,544 | 10,290 | ||||||||||||||
Noncurrent Assets: | ||||||||||||||||
Intangible assets - net | 2,589 | 2,695 | ||||||||||||||
Goodwill | 461 | 461 | ||||||||||||||
Deferred income tax asset | 0 | 1,698 | ||||||||||||||
Noncurrent assets held for sale | 0 | 7,633 | ||||||||||||||
Intangible assets – net | 1,500 | 1,587 | ||||||||||||||
Income tax receivable | 296 | 0 | ||||||||||||||
Other noncurrent assets | 908 | 732 | 969 | 838 | ||||||||||||
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Total noncurrent assets | 3,958 | 13,219 | 2,765 | 2,425 | ||||||||||||
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TOTAL ASSETS | $ | 38,133 | $ | 44,105 | $ | 27,791 | $ | 35,336 | ||||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,851 | $ | 3,391 | $ | 1,254 | $ | 1,571 | ||||||||
Current maturities of long-term debt | 503 | 7,473 | ||||||||||||||
Current maturities of long-term debt, net of debt issuance costs | 258 | 6,710 | ||||||||||||||
Accrued payroll and related taxes | 2,398 | 2,872 | 2,381 | 2,098 | ||||||||||||
Due to third party payors | 630 | 1,883 | 293 | 658 | ||||||||||||
Current liabilities held for sale | 0 | 2,745 | ||||||||||||||
Other accrued expenses | 1,258 | 1,687 | 1,099 | 1,277 | ||||||||||||
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Total current liabilities | 6,640 | 20,051 | 5,285 | 12,314 | ||||||||||||
Long-Term Liabilities | ||||||||||||||||
Long-term debt, net of debt issuance costs | 6,327 | 2,979 | 2,863 | 0 | ||||||||||||
Noncurrent liability for professional liability risks | 879 | 1,161 | 752 | 1,040 | ||||||||||||
Other noncurrent liabilities | 283 | 425 | 304 | 289 | ||||||||||||
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Total long-term liabilities | 7,489 | 4,565 | 3,919 | 1,329 | ||||||||||||
Commitment and Contingencies | ||||||||||||||||
Shareholders’ Equity | ||||||||||||||||
Preferred Shares, authorized and unissued, 2,000 shares | 0 | 0 | 0 | 0 | ||||||||||||
Common Shares, without par value: | ||||||||||||||||
Issued and outstanding, 9,163 shares at March 31, 2017 and 9,444 at June 30, 2016 | 4,581 | 4,722 | ||||||||||||||
Issued and outstanding, 7,417 shares at March 31, 2018 and 9,163 at June 30, 2017 | 3,708 | 4,581 | ||||||||||||||
Additionalpaid-in capital | 13,099 | 13,539 | 11,009 | 13,103 | ||||||||||||
Retained earnings | 6,744 | 1,648 | 4,197 | 4,336 | ||||||||||||
Accumulated other comprehensive loss | (420 | ) | (420 | ) | (327 | ) | (327 | ) | ||||||||
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Total Shareholders’ Equity | 24,004 | 19,489 | 18,587 | 21,693 | ||||||||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 38,133 | $ | 44,105 | $ | 27,791 | $ | 35,336 | ||||||||
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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)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
March 31, | March 31, | Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Operating revenues (net of contractual allowances) | $ | 13,883 | $ | 16,418 | $ | 41,321 | $ | 50,834 | $ | 13,550 | $ | 13,883 | $ | 41,021 | $ | 41,321 | ||||||||||||||||
Less provision for bad debts of Healthcare Facilities Segment | 184 | 213 | 321 | 1,461 | ||||||||||||||||||||||||||||
Less provision for bad debts of Healthcare Facilities segment | 133 | 184 | 363 | 321 | ||||||||||||||||||||||||||||
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Net revenues | 13,699 | 16,205 | 41,000 | 49,373 | 13,417 | 13,699 | 40,658 | 41,000 | ||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||
Cost of goods sold | 5,523 | 5,614 | 15,592 | 15,582 | 5,073 | 5,523 | 14,623 | 15,592 | ||||||||||||||||||||||||
Salaries, wages and benefits | 5,872 | 7,675 | 17,476 | 23,918 | 6,045 | 5,872 | 17,697 | 17,476 | ||||||||||||||||||||||||
Provision for bad debts of Specialty Pharmacy Segment | 126 | 69 | 342 | 429 | ||||||||||||||||||||||||||||
Provision for bad debts of Pharmacy segment | 237 | 126 | 445 | 342 | ||||||||||||||||||||||||||||
Supplies | 455 | 647 | 1,373 | 2,486 | 448 | 455 | 1,361 | 1,373 | ||||||||||||||||||||||||
Purchased services | 692 | 761 | 2,113 | 2,510 | 672 | 692 | 2,021 | 2,113 | ||||||||||||||||||||||||
Other operating expenses | 1,194 | 1,958 | 4,015 | 6,125 | 1,052 | 1,194 | 3,639 | 4,015 | ||||||||||||||||||||||||
Rent and lease expense | 142 | 191 | 409 | 582 | 157 | 142 | 471 | 409 | ||||||||||||||||||||||||
EHR incentive payments | 0 | 0 | (21 | ) | 0 | |||||||||||||||||||||||||||
Depreciation and amortization | 466 | 477 | 1,376 | 1,356 | 464 | 466 | 1,332 | 1,376 | ||||||||||||||||||||||||
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Operating Loss | (771 | ) | (1,187 | ) | (1,696 | ) | (3,615 | ) | (731 | ) | (771 | ) | (910 | ) | (1,696 | ) | ||||||||||||||||
Other Income, (Expense): | ||||||||||||||||||||||||||||||||
Other Income (Expense): | ||||||||||||||||||||||||||||||||
Gain on sale of assets | 2 | 5 | 3,019 | 12 | 183 | 2 | 181 | 3,019 | ||||||||||||||||||||||||
Loss on extinguishment of debt - net | 0 | 0 | (243 | ) | 0 | |||||||||||||||||||||||||||
Interest expense - net | (129 | ) | (211 | ) | (507 | ) | (637 | ) | ||||||||||||||||||||||||
Gain on economic damages claim, net | 0 | 0 | 944 | 0 | ||||||||||||||||||||||||||||
Loss on extinguishment of debt | 0 | 0 | (238 | ) | (243 | ) | ||||||||||||||||||||||||||
Interest expense, net | (56 | ) | (129 | ) | (302 | ) | (507 | ) | ||||||||||||||||||||||||
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Earnings (Loss) from Continuing Operations before income taxes | (898 | ) | (1,393 | ) | 573 | (4,240 | ) | (604 | ) | (898 | ) | (325 | ) | 573 | ||||||||||||||||||
Income Tax Expense (Benefit) | (8 | ) | (1 | ) | (236 | ) | 6,851 | |||||||||||||||||||||||||
Income Tax Benefit | 0 | (8 | ) | (296 | ) | (236 | ) | |||||||||||||||||||||||||
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Earnings (Loss) from Continuing Operations | (890 | ) | (1,392 | ) | 809 | (11,091 | ) | (604 | ) | (890 | ) | (29 | ) | 809 | ||||||||||||||||||
Earnings (Loss) from Discontinued Operations, net of tax | (135 | ) | (443 | ) | 4,287 | (1,758 | ) | 16 | (135 | ) | (110 | ) | 4,287 | |||||||||||||||||||
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Net Earnings (Loss) | (1,025 | ) | (1,835 | ) | 5,096 | (12,849 | ) | (588 | ) | (1,025 | ) | (139 | ) | 5,096 | ||||||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
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Comprehensive Earnings (Loss) | $ | (1,025 | ) | $ | (1,835 | ) | $ | 5,096 | $ | (12,849 | ) | $ | (588 | ) | $ | (1,025 | ) | $ | (139 | ) | $ | 5,096 | ||||||||||
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Earnings (Loss) Per Share: | ||||||||||||||||||||||||||||||||
Continuing Operations: | ||||||||||||||||||||||||||||||||
Basic | $ | (0.10 | ) | $ | (0.15 | ) | $ | 0.09 | $ | (1.17 | ) | $ | (0.08 | ) | $ | (0.10 | ) | $ | (0.00 | ) | $ | 0.09 | ||||||||||
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Diluted | $ | (0.10 | ) | $ | (0.15 | ) | $ | 0.09 | $ | (1.17 | ) | $ | (0.08 | ) | $ | (0.10 | ) | $ | (0.00 | ) | $ | 0.09 | ||||||||||
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Discontinued Operations: | ||||||||||||||||||||||||||||||||
Basic | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.46 | $ | (0.19 | ) | $ | 0.00 | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.46 | |||||||||||
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Diluted | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.45 | $ | (0.19 | ) | $ | 0.00 | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.45 | |||||||||||
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Net Earnings (Loss): | ||||||||||||||||||||||||||||||||
Basic | $ | (0.11 | ) | $ | (0.19 | ) | $ | 0.54 | $ | (1.36 | ) | $ | (0.08 | ) | $ | (0.11 | ) | $ | (0.02 | ) | $ | 0.54 | ||||||||||
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Diluted | $ | (0.11 | ) | $ | (0.19 | ) | $ | 0.54 | $ | (1.36 | ) | $ | (0.08 | ) | $ | (0.11 | ) | $ | (0.02 | ) | $ | 0.54 | ||||||||||
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Weighted-Average Common Shares Outstanding: | ||||||||||||||||||||||||||||||||
Basic | 9,334 | 9,443 | 9,408 | 9,443 | 7,417 | 9,334 | 8,564 | 9,408 | ||||||||||||||||||||||||
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Diluted | 9,334 | 9,443 | 9,429 | 9,443 | 7,417 | 9,334 | 8,564 | 9,429 | ||||||||||||||||||||||||
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See notes to condensed consolidated financial statements.
3
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Net Cash Used in Operating Activities | $ | (4,999 | ) | $ | (291 | ) | $ | (33 | ) | $ | (4,999 | ) | ||||
Cash Flows from Investing Activities: | ||||||||||||||||
Proceeds from sale of Chestatee | 14,620 | 0 | ||||||||||||||
Proceeds from sale of medical office building and other assets | 4,942 | 0 | ||||||||||||||
Expenditures for property, plant and equipment - continuing operations | (1,097 | ) | (1,127 | ) | ||||||||||||
Expenditures for property, plant and equipment - discontinued operations | 0 | (66 | ) | |||||||||||||
Cash Flows Provided by (Used in) Investing Activities: | ||||||||||||||||
Expenditures for property, plant and equipment – continuing operations | (1,502 | ) | (1,097 | ) | ||||||||||||
Proceeds from sale of other assets | 412 | 4,942 | ||||||||||||||
Proceeds from sale of hospital | 0 | 14,620 | ||||||||||||||
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Net Cash Provided by (Used in) Investing Activities | 18,465 | (1,193 | ) | (1,090 | ) | 18,465 | ||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Payments on long-term debt - continuing operation | (3,850 | ) | (601 | ) | ||||||||||||
Cash Flows Used in Financing Activities: | ||||||||||||||||
Repurchase of common shares | (640 | ) | 0 | (2,974 | ) | (640 | ) | |||||||||
Deposit of restricted cash | (1,000 | ) | 0 | |||||||||||||
Payments on long-term debt – continuing operations | (3,856 | ) | (3,850 | ) | ||||||||||||
Receipt (Deposit) of restricted cash | 1,000 | (1,000 | ) | |||||||||||||
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Net Cash Used in Financing Activities | (5,490 | ) | (601 | ) | (5,830 | ) | (5,490 | ) | ||||||||
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Net increase (decrease) in Cash and Cash Equivalents | 7,976 | (2,085 | ) | (6,953 | ) | 7,976 | ||||||||||
Cash and Cash Equivalents Beginning of Period | 3,261 | 5,974 | 10,494 | 3,261 | ||||||||||||
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Cash and Cash Equivalents End of Period | $ | 11,237 | $ | 3,889 | $ | 3,541 | $ | 11,237 | ||||||||
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Supplement Disclosure of Cash Flow Information: | ||||||||||||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||||||
Cash Paid for: | ||||||||||||||||
Interest | $ | 458 | $ | 579 | $ | 269 | $ | 458 | ||||||||
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Income taxes | $ | 141 | $ | 78 | $ | 0 | $ | 141 | ||||||||
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See notes to condensed consolidated financial statements.
4
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 20172018
(all dollar amounts in thousands except per share amounts)
(unaudited)
Note 1. –Basis– Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements as of March 31, 20172018 and for the three and nine month periods ended March 31, 20172018 and 20162017 have been prepared in accordance with Rule10-01 of RegulationS-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, 20162017 balance sheet included in this interim filing has been derived from the audited financial statements at that date but does not include all of the information and related notes required by GAAP for complete 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 Form10-K for the fiscal year ended June 30, 2016,2017, filed with the SEC on September 30, 2016.28, 2017. 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, 20172018 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
Note 2. – Business Operations
Business Operations
SunLink Health Systems, Inc., through subsidiaries, owns businesses which are providers ofprovide healthcare products and services in certainnon-urban markets in the southeastern United States. SunLink’sOur business is composed of two segments, the ownership of two business segments:
Louisiana with four service lines.
SunLink subsidiaries have conducted the healthcare facilities business since 2001 and the specialty pharmacy operations since 2008. Our Specialty Pharmacy Segment currently is operated through Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”), a subsidiary of our SunLink ScriptsRx, LLC subsidiary.
5
The business strategy of SunLink is to focus its efforts on expanding the services and improving internalthe operations of the existing pharmacy business and healthcare facilities subsidiaries and on the sale or dispositionprofitability of its subsidiaries’ underperforming assets.existing Healthcare Services and Pharmacy businesses. The Company considers the disposition of business segments, facilities and operations based on a variety of factorsis investing in addition to under-performance, including asset values, return on investments and competition from existing and potential competitors, capital improvement needs, the prevailing reimbursement environment under various Federal and state programs (e.g., Medicare and Medicaid) and by private payors, corporate strategy and other corporate objectives. The Company also is considering potential upgrades and improvements to certain of its healthcare facilities. The Company believesHealthcare Services and Pharmacy businesses, while seeking to sell certain facilities in its Healthcare Facilities Segment as well as its Speciality Pharmacy Segment continue to under-perform, and the Company has engaged advisors to assist it in evaluating the possible sale of its specialty pharmacy business lines. subsidiaries’ underperforming assets.
The Company has used a portion of the cash proceeds from recent dispositions of assets to pay offdown debt and certain other liabilities, and to repurchase common shares in a tender offeroffers completed in February and December 2017. The Company may also use a portion of its existing cash, as well as any net proceeds from future dispositions, if any, to improve its existing businesses, make acquisitions of Healthcare Services and Pharmacy businesses, prepay debt,debts, return capital to shareholders including through potential public or private purchases of share, make improvements to existing facilities,shares, and for other general corporate purposes. There can beis no assurance that any further dispositions if any, will be authorized by the Company’s Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after tax basis.
The Company considers the disposition of business segments, facilities and operations based on a variety of factors in addition to under-performance, including asset values, return on investments, competition from existing and potential competitors, capital improvement needs, the prevailing reimbursement environment under various Federal and state programs (e.g., Medicare and Medicaid) and private payors, and other corporate objectives. The Company believes certain facilities in its Healthcare Services segment as well as its Pharmacy segment continue to under-perform, and the Company has engaged advisors to assist it in evaluating the possible sale of its Pharmacy business lines.
On January 11, 2018, Carmichael’s Cashway Pharmacy, Inc., a wholly owned subsidiary of the Company, sold the assets of a retail pharmacy operation for approximately $410. Apre-tax gain of $183 on the sale of these assets is included in the results for the three months ended March 31, 2018.
5
Throughout these notes to the consolidated financial statements, SunLink Health Systems, Inc.,all references to “SunLink,” “we,” “our,” “ours,” “us” and its consolidated subsidiaries are referredthe “Company” refer 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. The Trace Hospital, pharmacyand our consolidated subsidiaries. References to our specific operations refer to operations conducted through our subsidiaries and businesses describedreferences to “we,” “our,” “ours,” and “us” in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc.such context refer to the operations.
Note 3. – Discontinued Operations
All of the businesses discussed in the note below are reported as discontinued operations and the condensed consolidated financial statements for all prior periods have been adjusted to reflect this presentation.
6
Results for all of the businesses included in discontinued operations are presented in the following table:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
March 31, | March 31, | Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Net Revenues: | ||||||||||||||||||||||||||||||||
Chestatee Hospital | $ | — | $ | 3,771 | $ | 2,369 | $ | 11,357 | $ | 0 | $ | 0 | $ | 0 | $ | 2,369 | ||||||||||||||||
Other Sold Hospitals | (68 | ) | 17 | (288 | ) | 148 | 77 | (68 | ) | 71 | (288 | ) | ||||||||||||||||||||
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$ | (68 | ) | $ | 3,788 | $ | 2,081 | $ | 11,505 | $ | 77 | $ | (68 | ) | $ | 71 | $ | 2,081 | |||||||||||||||
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Earnings (Loss) before income taxes: | ||||||||||||||||||||||||||||||||
Chestatee Hospital | $ | (104 | ) | $ | (322 | ) | $ | 83 | $ | (1,432 | ) | $ | 0 | $ | (104 | ) | $ | (38 | ) | $ | 83 | |||||||||||
Other Sold Hospitals | (69 | ) | (85 | ) | (304 | ) | (219 | ) | 61 | (69 | ) | 45 | (304 | ) | ||||||||||||||||||
Life sciences and engineering | (37 | ) | (36 | ) | (112 | ) | (107 | ) | (36 | ) | (37 | ) | (108 | ) | (112 | ) | ||||||||||||||||
Gain on sale of Chestatee Hospital | 0 | 0 | 7,270 | 0 | ||||||||||||||||||||||||||||
Gain (Loss) on sale of Chestatee Hospital | (9 | ) | 0 | (9 | ) | 7,270 | ||||||||||||||||||||||||||
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Earnings (Loss) before income taxes | (210 | ) | (443 | ) | 6,937 | (1,758 | ) | 16 | (210 | ) | (110 | ) | 6,937 | |||||||||||||||||||
Income tax expense (benefit) | (75 | ) | 0 | 2,650 | 0 | |||||||||||||||||||||||||||
Income tax expense | 0 | (75 | ) | 0 | 2,650 | |||||||||||||||||||||||||||
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Earnings (Loss) from discontinued operations | $ | (135 | ) | $ | (443 | ) | $ | 4,287 | $ | (1,758 | ) | $ | 16 | $ | (135 | ) | $ | (110 | ) | $ | 4,287 | |||||||||||
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Chestatee Hospital— – On August 19, 2016, Southern Health Corporation of Dahlonega, Inc., (“Chestatee”), a wholly owned subsidiary of the Company, sold substantially all of the assets and certain liabilities of Chestatee Regional Hospital in Dahlonega, Georgia through an asset purchase agreement for $15,000 subject to adjustment for the book value of certain assets and certain liabilities assumed at the sale date. Thepre-tax gain on sale of $7,270 is subject to adjustment for various purchase price adjustments. A purchase price adjustment of $328 is due to the Company from the hospital buyer as a post-closing adjustment to the purchase price as confirmed by a binding decision of an independent accountant rendered pursuant to the purchase agreement. Chestatee retained certain liabilities, including forcertain employee related liabilities and certain Medicare and Medicaid liabilities, relating to the period it owned and operated the hospital. A portion of the net proceeds werewas used for the repayment of debt. The assets sold and liabilities assumed are shown as assets held for sale in our consolidated balances as of June 30, 2016.
Other Sold Hospitals– Subsidiaries of the Company have sold substantially all of the assets of three hospitals (“Other Sold Hospitals”) during the period July 2, 2012 to December 31, 2014. The lossearnings (loss) before income taxes of the Other Sold Hospitals results primarily from negative prior year Medicare and Medicaid cost report settlements.
Life Sciences and Engineering Segment – SunLink retained a defined benefit retirement plan which covered substantially all of the employees of this segment when the segment was sold in fiscal 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and related tax benefit or expense is reflected in the results of operations for this segment for the three and nine months ended March 31, 20172018 and 2016.2017.
6
The components of pension expense for the three and nine months ended March 31, 20172018 and 2016,2017, respectively, were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest Cost | $ | 13 | $ | 16 | $ | 39 | $ | 48 | ||||||||
Expected return on assets | (8 | ) | (8 | ) | (24 | ) | (24 | ) | ||||||||
Amortization of prior service cost | 32 | 28 | 97 | 83 | ||||||||||||
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Net pension expense | $ | 37 | $ | 36 | $ | 112 | $ | 107 | ||||||||
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7
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Interest Cost | $ | 14 | $ | 13 | $ | 42 | $ | 39 | ||||||||
Expected return on assets | (9 | ) | (8 | ) | (27 | ) | (24 | ) | ||||||||
Amortization of prior service cost | 31 | 32 | 93 | 97 | ||||||||||||
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Net pension expense | $ | 36 | $ | 37 | $ | 108 | $ | 112 | ||||||||
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SunLink contributed $105 to the plan in the nine months ended March 31, 20172018 and expects to contribute an additional $35 during the last fiscal quarter of the fiscal year ending June 30, 2017.2018.
Note 4. – Economic Damages Claim
The Pharmacy Segment subsidiary asserted claims for economic damages in connection with the Deepwater Horizon Settlement Program related to the event which occurred in 2010. In January 2018, these claims were settled and payments of approximately $944 (net of costs and attorneys’ fees) were received. The net settlements are recognized as a gain in the Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) for the nine months ended March 31, 2018.
Note 5. – Restricted Cash
Under anthe Fourth Amendment to the Trace RDA Loan dated January 7, 2017 (see Note 8.9. Long-Term Debt), a deposit of $1,000 into anin a blocked interest bearing account was held by the lender. Under the Fifth Amendment to the Trace RDA Loan dated December 26, 2017, the blocked account was made with the lendereliminated and certain financial covenants were modified. The deposit, whicha prepayment was made on January 13, 2017, will remain in the blocked account until compliance is achieved with respect to financial covenants in effect prior to the Amendment or until November 15, 2017, when the modified financial covenants will revert back to thepre-modification amounts. At March 31, 2017, Trace was in compliance with the modified covenants but not with the prior covenants.RDA loan.
Note 5.6. – Shareholders’ Equity
Common Share Purchase Tender Offer–On November 21, 2017, SunLink purchased 280,800commenced a tender offer for the purchase of a portion of its common shares at a price of $1.50$1.60 per share as a result of a tender offer (the “Offer”) which. The offer expired February 24, 2017. The aggregate purchase price of theon December 21, 2017 with 3,725,656 common shares including expensestendered. In accordance with the terms and conditions of the Offer, was $640. The Offer was subject tothe Company accepted for payment a numbertotal of termsapproximately 1,745,751 shares at a price of $1.60 per share for a total cost of approximately $2,794, excluding fees and conditions described in the Offer to Purchase distributed to shareholders.
Charter Amendments to Protect Net Operating Losses–On November 7, 2016, SunLink’s shareholders approved amendmentsexpenses relating to the Company’s article of incorporation to restrict certain transfers of common shares in order to protect future use of the Company’s federal and state income tax net operating losses. The amendments generally void transfers of shares that would result in the creation of a new 4.9% shareholder or result in an existing 4.9% shareholder acquiring additional shares. The purpose of the amendments is to assist the Company in protecting the value of its accumulated NOLs by limiting transfers of the Company’s common shares that could ultimately result in an “ownership change” under Section 382 of the Internal Revenue Code. The amendments to the Company’s articles of incorporation are designed to work in tandem with the Tax Benefits Preservation Rights Plan adopted by the company’s board of directors in September 2016.
Tax Benefits Protection Rights Plan–On September 29, 2016, SunLink entered into a Tax Benefits Preservation Rights Plan (the “Tax Benefits Protection Rights Plan”). Effective September 29, 2016, the Board declared a dividend in the form of one preferred stock purchase right for each of the Company’s issued and outstanding common shares. The purpose of the Tax Benefits Protection Rights Plan is to diminish the risk that the Company’s ability to use its net operating losses and certain other tax assets to reduce potential future federal income tax obligations would become subject to limitations by reason of the Company experiencing an “ownership change,” as defined in Section 382 of the Code.Offer.
Stock-Based Compensation
–For the three months ended March 31, 20172018 and 2016,2017, the Company recognized $5$1 and $10,$5, respectively, in stock based compensation for options issued to employees and directors of the Company. For the nine months ended March 31, 20172018 and 2016,2017, the Company recognized $59$7 and $49,$59, respectively, in stock based compensation for options issued to employees and directors of the Company. The fair value of the share options granted was estimated using the Black-Scholes option pricing model. There were 72,0000 and 30,00072,000 share options granted under the 2011 Director Stock Option Plan during the nine months ended March 31, 2018 and 2017, and 2016, respectively. There were 45,000 share options granted under the 2005 Equity Incentive Plan during the nine months ended March 31, 2016.
Note 6.7. – Revenue Recognition and Accounts Receivables
The Company’s subsidiaries recognize revenues in the period in which services are provided. Accounts receivable primarily consist of amounts due from third-party payors and patients. The Company’s subsidiaries’ ability to collect outstanding receivables is critical to their results of operations and cash flows. Amounts the Company’s subsidiaries receive for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”) and other private insurers are generally less than the Company’s subsidiaries’ established billing rates. Additionally, to provide for accounts receivable that could become uncollectible in the future an allowance for doubtful accounts is established to reduce the carrying value of such receivables to their estimated net realizable value. Accordingly, the revenues and accounts receivable reported in the accompanying unaudited condensed consolidated financial statements are recorded at the net amount expected to be received.
87
Revenues by payor were as follows for the three and nine months ended March 31, 20172018 and 2016:2017:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
March 31, | March 31, | Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Healthcare Facilities Segment: | ||||||||||||||||||||||||||||||||
Medicare | $ | 2,079 | $ | 3,199 | $ | 6,447 | $ | 9,202 | $ | 2,485 | $ | 2,079 | $ | 7,167 | $ | 6,447 | ||||||||||||||||
Medicaid | 2,285 | 3,006 | 7,185 | 9,235 | 2,091 | 2,285 | 6,328 | 7,185 | ||||||||||||||||||||||||
Self-pay | 86 | 107 | 356 | 1,231 | 91 | 86 | 532 | 356 | ||||||||||||||||||||||||
Managed Care & Other Insurance | 871 | 1,411 | 2,248 | 5,840 | 793 | 871 | 2,278 | 2,248 | ||||||||||||||||||||||||
Other | 92 | 35 | 374 | 102 | 330 | 364 | 1,091 | 1,139 | ||||||||||||||||||||||||
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Revenues before provision for doubtful accounts | 5,413 | 7,758 | 16,610 | 25,610 | 5,790 | 5,685 | 17,396 | 17,375 | ||||||||||||||||||||||||
Provision for doubtful accounts | (184 | ) | (213 | ) | (321 | ) | (1,461 | ) | (133 | ) | (184 | ) | (363 | ) | (321 | ) | ||||||||||||||||
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Healthcare Facilities Segment Net Revenues | 5,229 | 7,545 | 16,289 | 24,149 | 5,657 | 5,501 | 17,033 | 17,054 | ||||||||||||||||||||||||
Pharmacy Segment Net Revenues | 8,198 | 8,509 | 23,946 | 24,644 | 7,760 | 8,198 | 23,625 | 23,946 | ||||||||||||||||||||||||
Other Revenues | 272 | 151 | 765 | 580 | ||||||||||||||||||||||||||||
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Total Net Revenues | $ | 13,699 | $ | 16,205 | $ | 41,000 | $ | 49,373 | $ | 13,417 | $ | 13,699 | $ | 40,658 | $ | 41,000 | ||||||||||||||||
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The net revenues of the Healthcare Facilities Segments included increases of $38 and $385 resulting from prior years’ Medicare cost report settlements for the three and nine months ended March 31, 2017 and increases (reductions) of $140 and ($662) resulting from prior years’ Medicare cost report settlements for the three and nine months ended March 31, 2016. The net revenues of the Pharmacy Segment are presented net of contractual adjustments. The provision for bad debts of the Pharmacy Segment is presented as a component of operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.Earnings (Loss).
Summary information for accounts receivable is as follows:
March 31 | June 30, | |||||||||||||||
2017 | 2016 | March 31, 2018 | June 30, 2017 | |||||||||||||
Accounts receivable (net of contractual allowances) | $ | 7,010 | $ | 7,157 | $ | 6,453 | $ | 6,458 | ||||||||
Less allowance for doubtful accounts | (710 | ) | (991 | ) | (569 | ) | (552 | ) | ||||||||
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Patient accounts receivable - net | $ | 6,300 | $ | 6,166 | ||||||||||||
Patient accounts receivable – net | $ | 5,884 | $ | 5,906 | ||||||||||||
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98
The following is a summary of the activity in the allowance for doubtful accounts for the Healthcare FacilitiesServices Segment and the Pharmacy Segment for the three and nine months ended March 31, 20172018 and 2016:2017:
Healthcare Services | Pharmacy | Total | ||||||||||||||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||
Balance at January 1, 2018 | $ | 326 | $ | 219 | $ | 545 | ||||||||||||||||||
Additions recognized as a reduction to revenues: | ||||||||||||||||||||||||
Continuing Operations | 133 | 237 | 370 | |||||||||||||||||||||
Discontinued Operations | (4 | ) | 0 | (4 | ) | |||||||||||||||||||
Accounts written off, net of recoveries | (82 | ) | (260 | ) | (342 | ) | ||||||||||||||||||
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Balance at March 31, 2018 | $ | 373 | $ | 196 | $ | 569 | ||||||||||||||||||
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Healthcare Services | Pharmacy | Total | ||||||||||||||||||||||
Nine Months Ended March 31, 2018 | ||||||||||||||||||||||||
Balance at July 1, 2017 | $ | 328 | $ | 224 | $ | 552 | ||||||||||||||||||
Additions recognized as a reduction to revenues: | ||||||||||||||||||||||||
Continuing Operations | 363 | 445 | 808 | |||||||||||||||||||||
Discontinued Operations | 2 | 0 | 2 | |||||||||||||||||||||
Accounts written off, net of recoveries | (320 | ) | (473 | ) | (793 | ) | ||||||||||||||||||
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Balance at March 31, 2018 | $ | 373 | $ | 196 | $ | 569 | ||||||||||||||||||
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Healthcare Services | Pharmacy | Total | ||||||||||||||||||||||
Three Months Ended March 31, 2017 | Healthcare | |||||||||||||||||||||||
Facilities | Pharmacy | Total | ||||||||||||||||||||||
Balance at January 1, 2017 | $ | 332 | $ | 400 | $ | 732 | $ | 332 | $ | 400 | $ | 732 | ||||||||||||
Additions recognized as a reduction to revenues: | ||||||||||||||||||||||||
Continuing Operations | 184 | 126 | 310 | 184 | 126 | 310 | ||||||||||||||||||
Discontinued Operations | (14 | ) | — | (14 | ) | (14 | ) | 0 | (14 | ) | ||||||||||||||
Accounts written off, net of recoveries | (180 | ) | (138 | ) | (318 | ) | (180 | ) | (138 | ) | (318 | ) | ||||||||||||
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Balance at March 31, 2017 | $ | 322 | $ | 388 | $ | 710 | $ | 322 | $ | 388 | $ | 710 | ||||||||||||
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NIne Months Ended March 31, 2017 | Healthcare | |||||||||||||||||||||||
Facilities | Pharmacy | Total | Healthcare Services | Pharmacy | Total | |||||||||||||||||||
Nine Months Ended March 31, 2017 | ||||||||||||||||||||||||
Balance at July 1, 2016 | $ | 624 | $ | 367 | $ | 991 | $ | 624 | $ | 367 | $ | 991 | ||||||||||||
Additions recognized as a reduction to revenues: | ||||||||||||||||||||||||
Continuing Operations | 321 | 342 | 663 | 321 | 342 | 663 | ||||||||||||||||||
Discontinued Operations | 378 | — | 378 | 378 | 0 | 378 | ||||||||||||||||||
Accounts written off, net of recoveries | (1,001 | ) | (321 | ) | (1,322 | ) | (1,001 | ) | (321 | ) | (1,322 | ) | ||||||||||||
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Balance at March 31, 2017 | $ | 322 | $ | 388 | $ | 710 | $ | 322 | $ | 388 | $ | 710 | ||||||||||||
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Three Months Ended March 31, 2016 | Healthcare | |||||||||||||||||||||||
Facilities | Pharmacy | Total | ||||||||||||||||||||||
Balance at January 1, 2016 | $ | 4,055 | $ | 432 | $ | 4,487 | ||||||||||||||||||
Additions recognized as a reduction to revenues: | ||||||||||||||||||||||||
Continuing Operations | 213 | 69 | 282 | |||||||||||||||||||||
Discontinued Operations | 530 | — | 530 | |||||||||||||||||||||
Accounts written off, net of recoveries | (1,698 | ) | (146 | ) | (1,844 | ) | ||||||||||||||||||
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Balance at March 31, 2016 | $ | 3,100 | $ | 355 | $ | 3,455 | ||||||||||||||||||
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Nine Months Ended March 31, 2016 | Healthcare | |||||||||||||||||||||||
Facilities | Pharmacy | Total | ||||||||||||||||||||||
Balance at July 1, 2015 | $ | 4,962 | $ | 385 | $ | 5,347 | ||||||||||||||||||
Additions recognized as a reduction to revenues: | ||||||||||||||||||||||||
Continuing Operations | 1,461 | 429 | 1,890 | |||||||||||||||||||||
Discontinued Operations | 2,116 | — | 2,116 | |||||||||||||||||||||
Accounts written off, net of recoveries | (5,439 | ) | (459 | ) | (5,898 | ) | ||||||||||||||||||
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Balance at March 31, 2016 | $ | 3,100 | $ | 355 | $ | 3,455 | ||||||||||||||||||
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New Accounting Pronouncement for Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB��) issued Accounting Standards Update (“ASU”) 2014-09, which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. This ASU provides companies the option of applying a full or modified retrospective approach upon adoption. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. The Company expects to adopt this ASU on July 1, 2018 and is currently implementing its plan for adoption and evaluating the impact on its revenue recognition policies, procedures and control framework and the resulting impact on its consolidated financial position, results of operations and cash flows. A significant element of executing this plan is the process of reviewing sources of revenue and evaluating the patient account population to determine the appropriate distribution of patient accounts into portfolios with similar collection experience that, when evaluated for collectability, will result in a materially consistent revenue amount for such portfolios as if each patient account was evaluated on a contract-by-contract basis. The Company is currently evaluating the appropriate portfolios to apply in its collectability analysis and is considering the impact of applying the new standard when its patient accounts are evaluated in those portfolios. The Company expects this process will be completed later in 2018.
Additionally, the adoption of the new accounting standard will impact the presentation on the Company’s statement of operations for a significant component of its provision for bad debts. After adoption of the new standard, the majority of what is currently classified as the provision for bad debts will be reflected as an implicit price concession as defined in the standard and therefore an adjustment to net patient revenue. The Company will continue to evaluate certain changes in collectability on its self-pay patient accounts receivable resulting from certain credit and collection issues not assessed at the date of service, including bankruptcy, and recognize such amounts in the provision for bad debts included in operating expenses on the statement of operations. The Company cannot reasonably estimate at this time the quantitative impact that the adoption of this accounting standard will have on the financial statements of the Company.
109
Note 7. - Goodwill and8. – Intangible Assets
SunLink’s goodwill and intangible assets are composed of:
March 31, | June 30, | |||||||
2017 | 2016 | |||||||
Pharmacy Segment Goodwill | $ | 461 | $ | 461 | ||||
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Intangibles consist of the following, net of amortization:
March 31, | June 30, | |||||||||||||||
2017 | 2016 | March 31, 2018 | June 30, 2017 | |||||||||||||
Pharmacy Segment Intangibles | ||||||||||||||||
Trade Name(non-amortizing) | 2,000 | 2,000 | 1,180 | 1,180 | ||||||||||||
Customer Relationships | 1,089 | 1,089 | 1,089 | 1,089 | ||||||||||||
Medicare License | 769 | 769 | 623 | 623 | ||||||||||||
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3,858 | 3,858 | 2,892 | 2,892 | |||||||||||||
Accumulated Amortization | (1,269 | ) | (1,163 | ) | (1,392 | ) | (1,305 | ) | ||||||||
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Net Intangibles | $ | 2,589 | $ | 2,695 | $ | 1,500 | $ | 1,587 | ||||||||
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Amortization expense was $35$29 and $35 for the three months ended March 31, 20172018 and 2016,2017, respectively. Amortization expense was $106$87 and $106 for the nine months ended March 31, 20172018 and 2016,2017, respectively.
Note 8. –Long-Term9. – Long-Term Debt
Long-term debt consisted of the following:
March 31, | June 30, | |||||||||||||||
2017 | 2016 | March 31, 2018 | June 30, 2017 | |||||||||||||
Trace RDA Loan | $ | 7,321 | $ | 7,698 | $ | 3,347 | $ | 7,191 | ||||||||
SHPP RDA Loan | 0 | 1,950 | ||||||||||||||
Carmichael Notes | 0 | 1,508 | ||||||||||||||
Capital lease obligations and other | 17 | 32 | 0 | 12 | ||||||||||||
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Total | 7,338 | 11,188 | 3,347 | 7,203 | ||||||||||||
Less unamortized debt issuance costs | (508 | ) | (736 | ) | (226 | ) | (493 | ) | ||||||||
Less current maturities | (503 | ) | (7,473 | ) | (258 | ) | (6,710 | ) | ||||||||
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Long-term Debt | $ | 2,863 | $ | 0 | ||||||||||||
$ | 6,327 | $ | 2,979 |
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Trace RDA Loan and Trace Working Capital Loan—–On July 11, 2012, Southern Health Corporation of Houston, Inc. (“Trace”) a wholly owned subsidiary of the Company, closed on a $9,975 Mortgage Loan Agreement (“Trace RDA Loan”) and a Working Capital Loan Agreement (which expired on July 2, 2016) with a bank, both dated as of July 5, 2012.
The Trace RDA Loan has a term of 15 years with level monthly payments of principal and interest until repaid. TheOn December 26, 2017, the Fifth Amendment to Loan Agreement, Modification of Note and Waiver (“Modification”) was entered into by Trace and the bank. Under the Modification, Trace made a $3,548 prepayment on the Trace RDA Loan. The monthly principal and interest payments on the RDA Loan bears a floatingwere reduced to $39 per month, the interest rate of interest equalwas reduced to the greater of (i) the prime rate (as published in Thethe Wall Street Journal) plus 1.5%1% with a floor of 5.5%, or (ii) 6% (6.0%(5.75% at March 31, 2017).2018) and certain loan covenants were modified. The Modification also included a waiver of covenant violations for the quarters ended June 30 and September 30, 2017. Trace was in compliance with the amended financial covenants at March 31, 2018. In connection with the modification and prepayment, an existing deposit of $1,000 in a blocked, interest bearing account with the lender was released. The Trace RDA Loan is collateralized by real estate and equipment of Trace in Houston, MS, and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program.
The Trace RDA Loan contains various terms and conditions, including financial restrictions and limitations, and affirmative and negative covenants. The covenants include financial covenants measured on a quarterly basis which require Trace to comply with a ratio of current assets to current liabilities, debt service coverage, fixed charge ratio, and funded debt to EBITDA, all as defined in the Trace RDA Loan. At September 30, 2016 and June 30, 2016, Trace was not in compliance with the debt service coverage, fixed charge ratio and funded debt to EBITDA ratios.
11
The Company received a waiver of thesenon-compliances from the lender for both measurement dates and the Trace RDA Loan was amended by the Fourth Amendment to Loan Agreement and Waiver dated January 6, 2017. Under the Fourth Amendment, the debt service coverage, the fixed charge coverage and funded debt to EBITDA ratios were amended for periods ended December 31, 2016, March 31, 2017 and June 30, 2017 and an additional covenant was entered into requiring the deposit of $1,000 into a blocked interest bearing account with the lender. The deposit, which was made on January 13, 2017, will remain in the blocked account until Trace achieves compliance with financial covenants in effect prior to the Amendment or November 15, 2017, when the modified financial covenants will revert back to thepre-modification amounts. At March 31, 2017, Trace was in compliance with the modified covenants but not with the prior covenants. Indebtedness of $7,698 as of June 30, 2016 is presented in current liabilities in the condensed consolidated balance sheet as a result of the financial covenantnon-compliance at that date. The ability of Trace to continue to make the required debt service payments under the Trace RDA Loan depends on, among other things, its ability to generate sufficient cash, flows, including from operating activities.activities and asset sales. If Trace is unable to generate sufficient cash flow from operations to meet debt service payments on the Trace RDA Loan, including in the event the lender were to declare an event of default and accelerate the maturity of the indebtedness, such failure could have material adverse effects on the Company. The Trace RDA Loan is guaranteed by the Company and one subsidiary.
SHPP RDA Loan—On November 6, 2012, SunLink Healthcare Professional Property, LLC, (“SHPP”) a subsidiary of the Company, entered into and closed on a $2,100 term loan dated as of October 31, 2012 (the “SHPP RDA Loan”) with a bank. On December 16, 2016, SHPP repaid the remaining $1,933 outstanding principal balance of this loan when it sold the collateral for the SHPP RDA Loan, a medical office building located in Ellijay, Georgia. An early repayment penalty of $97 was paid at that date as required by loan terms and $192 of unamortized prepaid loan costs were expensed as of the sale date, both of which were reported as a loss on early repayment of debt of $289 for the nine months ended March 31, 2017.
Carmichael Notes—On April 22, 2008, SunLink Scripts Rx, LLC issued a $3,000 promissory note with an interest rate of 8% to the former owners of Carmichael as part of the acquisition purchase price (the “Carmichael Notes”). The Carmichael Notes, as amended, were payable in semi-annual installments of $185 of principal and plus accrued interest, with the remaining balance of $1,255 due October 22, 2017. Under an agreement dated September 9, 2016, between the Company and the Note holders, the Carmichael Notes balance of $1,508 was paid in full on September 9, 2016 and the accrued interest payable to that date of $46 was forgiven. A gain on retirement of debt of $46 for the nine months ended March 31, 2017 was reported for the accrued interest forgiveness.
ASU2016-3, “Simplifying the Presentation of Debt Issuance Costs” —In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update(“ASU”) 2016-3, “Simplifying the Presentation of Debt Issuance Costs” (“ASU2016-3”). ASU2016-3 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than separately as an asset. The Company adopted the provisions of ASU2016-3 on July 1, 2016 and retrospectively for all periods presented. The adoption of ASU2016-3 had no impact on the Company’s results of operations or cash flows.
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The following is a summary of the line items impact of the adoption of ASU2016-3 in the Company’s June 30, 2016 accompanying condensed consolidated balance sheet:
As | Adjustments | As | ||||||||||
Originally | for the Adoption | Currently | ||||||||||
Reported | of ASU2015-3 | Reported | ||||||||||
Prepaid expense and other current assets | $ | 2,777 | $ | (9 | ) | $ | 2,768 | |||||
Total current assets | $ | 17,901 | $ | (9 | ) | $ | 17,892 | |||||
Other noncurrent assets | $ | 1,459 | $ | (727 | ) | $ | 732 | |||||
Total noncurrent assets | $ | 13,946 | $ | (727 | ) | $ | 13,219 | |||||
Total Assets | $ | 44,841 | $ | (736 | ) | $ | 44,105 | |||||
Current maturities of long-term debt | $ | 8,012 | $ | (539 | ) | $ | 7,473 | |||||
Total current liabilities | $ | 20,590 | $ | (539 | ) | $ | 20,051 | |||||
Long-term debt | $ | 3,176 | $ | (197 | ) | $ | 2,979 | |||||
Total long-term liabilities | $ | 4,762 | $ | (197 | ) | $ | 4,565 | |||||
Total Liabilities and Shareholders’ Equity | $ | 44,841 | $ | (736 | ) | $ | 44,105 |
Note 9.10. – Income Taxes
Income tax benefit of $0 ($0 federal tax and $0 state tax expense) and income tax benefit of $8 ($32 federal tax benefit and $24 state tax expense) and income tax benefit of $1 ($0 federal tax expense and $1 state tax benefit) was recorded for continuing operations for the three months ended March 31, 20172018 and 2016,2017, respectively. Income tax benefit of $296 ($296 federal tax benefit and $0 state tax expense) and income tax benefit of $236 ($221 federal tax benefit and $15 state tax benefit) and income tax expense of $6,851 ($6,210 federal tax expense and $641 state tax expense) was recorded for continuing operations for the nine months ended March 31, 20172018 and 2016,2017, respectively.
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.
The Tax Cut and Jobs Act (“TCJA”) was enacted on December 22, 2017. Under ASC 740, the impact of changes in tax law must be recorded in the financial statements in the reporting period that included the date of enactment. However, the SEC and the FASB both recognize that the magnitude of this law change will require extensive analysis and calculations to conform to the new provisions. The SEC issued Staff Accounting Bulletin (‘SAB”) 118 on December 22, 2017. SAB 118 provides registrants with guidance on when and how to report the impact of the law change when not all necessary information is available.
At March 31, 2017,2018, consistent with the above process,processes, we evaluated the need for a valuation allowance against our deferred tax assets and determined that it was more likely than not that noneonly our federal alternative minimum tax (“AMT”) tax credits of our deferred tax assets$296 would be realized. AsThe AMT credit represents a result,provisional amount that will be finalized upon the filing of the Company’s federal income tax return for the year ended June 30, 2017. The filing of this return will occur prior to the Company’s fiscal year end which is within the measurement period. Under TCJA, AMT tax credits will now become refundable in conjunction with the repeal of the corporate AMT. For tax years beginning after December 31, 2017 and before January 1, 2022, the AMT credit is refundable in an amount equal to 50% (100% for the 2021 tax year) of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability. This results in the Company receiving its entire AMT credit of $296 as a refund no later than fiscal 2022 and as such a valuation allowance is no longer needed for the AMT credit carryforward. However, in accordance with ASC 740, we recognized a valuation allowance of $10,206$8,071 against theall other net deferred tax asset so that there is no net long-term deferred income tax asset or liabilityitems at March 31, 2017.2018. We conducted our evaluation by considering available positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. Also, more significant weight was given to evidence that directly related to our current financial performance as compared to less current evidence and future plans.
The principal negative evidence that led us to determine at March 31, 20172018 that all$8,071 of the net deferred tax assets resulting fromnon-AMT credit carryforwards should have full valuation allowances was the three-year cumulativepre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare FacilitiesServices Segment businesses operate.
For Federal income tax purposes, at March 31, 2017,2018, the Company had approximately $11,100$13,400 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. TheThese net operating loss carryforwards expire in 2024.2025. With the enactment of TCJA, Federal net operating loss carryforwards generated in taxable years ending after December 31, 2017 now have no expiration date.
11
Note 10.11. – Commitments and Contingencies
Sale of Hospital Facilities — The Company has sold four hospital facilities since June��30, 2012 and in connection with the sales has retained certain assets and liabilities. – See Note 3 Discontinued Operations.
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Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to outstanding debt,non-cancelable operating leases and interest on outstanding debt from continuing operations at March 31, 20172018 were as follows:
Interest on | ||||||||||||||||||||||||
Payments | Long-Term | Operating | Outstanding | |||||||||||||||||||||
due in: | Debt | Leases | Debt | |||||||||||||||||||||
Payments due in: | Long-Term Debt | Operating Leases | Interest on Outstanding Debt | |||||||||||||||||||||
1 year | $ | 503 | $ | 545 | $ | 396 | $ | 258 | $ | 574 | $ | 172 | ||||||||||||
2 years | 561 | 402 | 400 | 296 | 423 | 173 | ||||||||||||||||||
3 years | 596 | 336 | 366 | 315 | 340 | 155 | ||||||||||||||||||
4 years | 634 | 243 | 328 | 333 | 132 | 136 | ||||||||||||||||||
5+ years | 5,044 | 59 | 803 | 2,145 | 4 | 355 | ||||||||||||||||||
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$ | 7,338 | $ | 1,585 | $ | 2,293 | $ | 3,347 | $ | 1,473 | $ | 991 | |||||||||||||
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On September 8, 2017, the Georgia Survey agency of the Georgia Department of Community Health (“DCH“) conducted a Complaint Investigation survey to determine whether our nursing home in Ellijay, Georgia was in compliance with federal program requirements for nursing homes participating in Medicare and/or Medicaid programs. As a result of this survey, the nursing home received from the DCH a notice of deficiencies which were identified as posing an immediate jeopardy to resident health and safety and which had to be corrected immediately. DCH also notified the nursing home of its intent to recommend civil monetary penalties. In response to the survey findings, the nursing home adopted a succession of plans to remedy the matters identified. On November 6, 2017, DCH advised the nursing home that its latest plan of correction was accepted and on November 20, 2017, DCH advised the nursing home that it was in substantial compliance with its long-term care requirements; however the nursing home anticipates further surveys to evaluate its implementation of the plans of correction. A Civil Money Penalty (“CMP”) was imposed by the Department of Health & Human Services Centers for Medicare and Medicaid Services on January 4, 2018 which resulted in $170 expensed in the nine months ended March 31, 2018. The CMP was paid January 18, 2018.
Note 11. -12. – Related Party Transactions
A director of the Company and the Company’s former corporate secretary are membersis a member of two differenta law firms, each offirm which provides services to SunLink. The Company has expensed an aggregate of $109$25 and $71$109 for legal services to thesethis law firmsfirm in the three months ended March 31, 20172018 and 2016,2017, respectively. The Company has expensed an aggregate of $481$215 and $204$481 for legal services to thesethis law firmsfirm in the nine months ended March 31, 20172018 and 2016,2017, respectively. Included in the Company’s condensed consolidated balance sheets at March 31, 20172018 and June 30, 20162017 is $21$12 and $75,$38, respectively, of amounts payable to thesethis law firms.firm.
Note 12. -13. – Sale of Assets
On January 11, 2018, Carmichael’s Cashway Pharmacy, Inc., a wholly owned subsidiary of the Company, sold the assets of a retail pharmacy operation it operates for approximately $410. Apre-tax gain on the sale of the assets of approximately $183 is included in the results for the three months ended March 31, 2018.
Note 14. – Financial Information by Segment
Under ASC Topic No. 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of SunLink’s chief executive officer and other members of SunLink’s senior management. Our two reportable operating segments are Healthcare FacilitiesServices and Pharmacy.
12
We evaluate performance of our operating segments based on revenue and operating profit (loss). At the beginning of the current fiscal year, the Company modified the approach to certain assets, and expense allocations to calculate segment assets, operating profit and depreciation and amortization. All prior year amounts have been
14
changed to consistently apply the changed allocation method used in the current year. Segment information as of March 31, 20172018 and 20162017 and for the three and nine months then ended is as follows:
Healthcare | Corporate | Healthcare Facilities | Pharmacy | Corporate and Other | Total | |||||||||||||||||||||||||||
Facilities | Pharmacy | and Other | Total | |||||||||||||||||||||||||||||
As of and for the three months ended March 31, 2017 | ||||||||||||||||||||||||||||||||
As of and for the three months ended March 31, 2018 | ||||||||||||||||||||||||||||||||
Net revenues from external customers | $ | 5,229 | $ | 8,198 | $ | 272 | $ | 13,699 | $ | 5,657 | $ | 7,760 | $ | 0 | $ | 13,417 | ||||||||||||||||
Operating loss | (112 | ) | (324 | ) | (335 | ) | (771 | ) | ||||||||||||||||||||||||
Operating profit (loss) | 114 | (367 | ) | (478 | ) | (731 | ) | |||||||||||||||||||||||||
Depreciation and amortization | 150 | 289 | 27 | 466 | 167 | 297 | 0 | 464 | ||||||||||||||||||||||||
Assets | 12,458 | 11,519 | 14,156 | 38,133 | 14,394 | 9,104 | 4,293 | 27,791 | ||||||||||||||||||||||||
Expenditures for property, plant and equipment | 24 | 264 | 1 | 289 | 167 | 263 | 0 | 430 | ||||||||||||||||||||||||
As of and for the three months ended March 31, 2016 | ||||||||||||||||||||||||||||||||
As of and for the three months ended March 31, 2017 | ||||||||||||||||||||||||||||||||
Net revenues from external customers | $ | 7,545 | $ | 8,509 | $ | 151 | $ | 16,205 | $ | 5,501 | $ | 8,198 | $ | 0 | $ | 13,699 | ||||||||||||||||
Operating loss | (638 | ) | — | (549 | ) | (1,187 | ) | |||||||||||||||||||||||||
Operating profit (loss) | (146 | ) | (324 | ) | (301 | ) | (771 | ) | ||||||||||||||||||||||||
Depreciation and amortization | 176 | 289 | 1 | 466 | ||||||||||||||||||||||||||||
Assets | 13,936 | 11,519 | 12,678 | 38,133 | ||||||||||||||||||||||||||||
Expenditures for property, plant and equipment | 25 | 264 | 0 | 289 | ||||||||||||||||||||||||||||
As of and for the nine months ended March 31, 2018 | ||||||||||||||||||||||||||||||||
Net revenues from external customers | $ | 17,033 | $ | 23,625 | $ | 0 | $ | 40,658 | ||||||||||||||||||||||||
Operating profit (loss) | 118 | 285 | (1,313 | ) | (910 | ) | ||||||||||||||||||||||||||
Depreciation and amortization | 186 | 246 | 45 | 477 | 485 | 845 | 2 | 1,332 | ||||||||||||||||||||||||
Assets | 26,288 | 12,135 | 6,496 | 44,919 | 14,394 | 9,104 | 4,293 | 27,791 | ||||||||||||||||||||||||
Expenditures for property, plant and equipment | 8 | 292 | 2 | 302 | 980 | 522 | 0 | 1,502 | ||||||||||||||||||||||||
As of and for the nine months ended March 31, 2017 | ||||||||||||||||||||||||||||||||
Net revenues from external customers | $ | 16,289 | $ | 23,946 | $ | 765 | $ | 41,000 | $ | 17,054 | $ | 23,946 | $ | 0 | $ | 41,000 | ||||||||||||||||
Operating profit (loss) | 443 | (511 | ) | (1,628 | ) | (1,696 | ) | 146 | (511 | ) | (1,331 | ) | (1,696 | ) | ||||||||||||||||||
Depreciation and amortization | 497 | 810 | 69 | 1,376 | 563 | 810 | 3 | 1,376 | ||||||||||||||||||||||||
Assets | 12,458 | 11,519 | 14,156 | 38,133 | 13,936 | 11,519 | 12,678 | 38,133 | ||||||||||||||||||||||||
Expenditures for property, plant and equipment | 246 | 739 | 112 | 1,097 | 358 | 739 | 0 | 1,097 | ||||||||||||||||||||||||
As of and for the nine months ended March 31, 2016 | ||||||||||||||||||||||||||||||||
Net revenues from external customers | $ | 24,149 | $ | 24,644 | $ | 580 | $ | 49,373 | ||||||||||||||||||||||||
Operating profit (loss) | (2,134 | ) | 216 | (1,697 | ) | (3,615 | ) | |||||||||||||||||||||||||
Depreciation and amortization | 545 | 666 | 145 | 1,356 | ||||||||||||||||||||||||||||
Assets | 26,288 | 12,135 | 6,496 | 44,919 | ||||||||||||||||||||||||||||
Expenditures for property, plant and equipment | 93 | 1,031 | 3 | 1,127 |
1513
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,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on 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. 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
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Liabilities, Claims, Obligations and Other Matters
Regulation and Governmental Activity
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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 actual future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Quarterly Report or our other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of SunLink.
We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based, except as required by applicable law. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the other risk factors set forth elsewhere in this report and in our Annual Report on Form10-K.
Business Strategy: Operations, Dispositions and Acquisitions
The business strategy of SunLink is to focus its efforts on expanding the services and improving internalthe operations of the existing pharmacy business and healthcare facilities subsidiaries and on the sale or dispositionprofitability of its subsidiaries’ underperforming assets.existing Healthcare Services and Pharmacy businesses. The Company considers the disposition of business segments, facilities and operations based on a variety of factorsis investing in addition to under-performance, including asset values, return on investments and competition from existing and potential competitors, capital improvement needs, the prevailing reimbursement environment under various Federal and state programs (e.g., Medicare and Medicaid) and by private payors, corporate strategy and other corporate objectives. The Company also is considering potential upgrades and improvements to certain of its healthcare facilities. The Company believesHealthcare Services and Pharmacy businesses, while seeking to sell certain facilities in its Healthcare Facilities Segment as well as its Pharmacy Segment continue to under-perform, and the Company has engaged advisors to assist it in evaluating the possible sale of its specialty pharmacy business. subsidiaries’ underperforming assets.
The Company has used a portion of the cash proceeds from recent dispositions of assets to pay offdown debt and certain other liabilities, and to repurchase common shares in a tender offeroffers completed in February and December 2017. The Company may also use a portion of its existing cash, as well as any net proceeds from future dispositions, if any, to improve its existing businesses, make acquisitions of Healthcare Services and Pharmacy businesses, prepay debt,debts, return capital to shareholders including through potential public or private purchases of share, make improvements to existing facilities,shares, and for other general corporate purposes. There can beis no assurance that any further dispositions, if any, will be authorized by the Company’s Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after tax basis.
The Company considers the disposition of business segments, facilities and operations based on a variety of factors in addition to under-performance, including asset values, return on investments, competition from existing and potential competitors, capital improvement needs, the prevailing reimbursement environment under various Federal and state programs (e.g., Medicare and Medicaid) and private payors, and other corporate objectives. The Company believes certain facilities in its Healthcare Services segment as well as its Pharmacy segment continue to under-perform, and the Company has engaged advisors to assist it in evaluating the possible sale of its Pharmacy business lines.
1816
On January 11, 2018, Carmichael’s Cashway Pharmacy, Inc., a wholly owned subsidiary of the Company, sold the assets of a retail pharmacy operation it operates for $410. Apre-tax gain on the sale of the assets of $183 is included in the results for the three months ended March 31, 2018.
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:
Our critical accounting estimates are more fully described in our 20162017 Annual Report on Form10-K and continue to include the following areas:
Financial Summary
The results of continuing operations shown in the financial summary below are for our two business segments, Healthcare FacilitiesServices and Pharmacy.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
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Net Revenues - Healthcare Facilities | $ | 5,229 | $ | 7,545 | -30.7 | % | $ | 16,289 | $ | 24,149 | -32.5 | % | ||||||||||||
Net Revenues - Pharmacy | 8,198 | 8,509 | -3.7 | % | 23,946 | 24,644 | -2.8 | % | ||||||||||||||||
Other Revenues | 272 | 151 | 80.1 | % | 765 | 580 | 31.9 | % | ||||||||||||||||
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Total Net Revenues | 13,699 | 16,205 | -15.5 | % | 41,000 | 49,373 | -17.0 | % | ||||||||||||||||
Costs and expenses | (14,470 | ) | (17,392 | ) | -16.8 | % | (42,696 | ) | (52,988 | ) | -19.4 | % | ||||||||||||
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Operating loss | (771 | ) | (1,187 | ) | NA | (1,696 | ) | (3,615 | ) | NA | ||||||||||||||
Interest expense - net | (129 | ) | (211 | ) | -38.9 | % | (507 | ) | (637 | ) | -20.4 | % | ||||||||||||
Loss on extinguishment of debt | 0 | 0 | NA | (243 | ) | 0 | NA | |||||||||||||||||
Gain on sale of assets | 2 | 5 | -60.0 | % | 3,019 | 12 | NA | |||||||||||||||||
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Earning (Loss) from continuing operations before income taxes | $ | (898 | ) | $ | (1,393 | ) | 35.5 | % | $ | 573 | $ | (4,240 | ) | NA | ||||||||||
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Healthcare Facilities Segment: | ||||||||||||||||||||||||
Hospital and Nursing Home Admissions | 154 | 156 | -1 | % | 400 | 679 | -41 | % | ||||||||||||||||
Nursing Home Patient Days | 13,428 | 14,099 | -5 | % | 41,989 | 43,091 | -3 | % |
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||
2018 | 2017 | % Change | 2018 | 2017 | % Change | |||||||||||||||||||
Net Revenues – Healthcare Services | $ | 5,657 | $ | 5,501 | 2.8 | % | $ | 17,033 | $ | 17,054 | -0.1 | % | ||||||||||||
Net Revenues – Pharmacy | 7,760 | 8,198 | -5.3 | % | 23,625 | 23,946 | -1.3 | % | ||||||||||||||||
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Total Net Revenues | 13,417 | 13,699 | -2.1 | % | 40,658 | 41,000 | -0.8 | % | ||||||||||||||||
Costs and expenses | (14,148 | ) | (14,470 | ) | -2.2 | % | (41,568 | ) | (42,696 | ) | -2.6 | % | ||||||||||||
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Operating profit (loss) | (731 | ) | (771 | ) | -5.2 | % | (910 | ) | (1,696 | ) | -46.3 | % | ||||||||||||
Interest expense – net | (56 | ) | (129 | ) | -56.6 | % | (302 | ) | (507 | ) | -40.4 | % | ||||||||||||
Loss on extinguishment of debt | 0 | 0 | NA | (238 | ) | (243 | ) | -2.1 | % | |||||||||||||||
Gain on economic damages claim, net | 0 | 0 | NA | 944 | 0 | NA | ||||||||||||||||||
Gain (Loss) on sale of assets | 183 | 2 | NA | 181 | 3,019 | -94.0 | % | |||||||||||||||||
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Earnings (Loss) from continuing operations before income taxes | $ | (604 | ) | $ | (898 | ) | -32.7 | % | $ | (325 | ) | $ | 573 | -156.7 | % | |||||||||
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Healthcare Facilities Segment: | ||||||||||||||||||||||||
Hospital and Nursing Home Admissions | 196 | 154 | 27.3 | % | 518 | 399 | 29.8 | % | ||||||||||||||||
Hospital and Nursing Patient Days | 13,876 | 14,561 | -4.7 | % | 42,749 | 45,268 | -5.6 | % |
1917
Results of Operations
Healthcare FacilitiesServices Segment Net Revenues
The following table sets forth the percentage of net patient revenues from major payors for the Healthcare Facilities SegmentServices segment for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
March 31, | March 31, | Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Source: | ||||||||||||||||||||||||||||||||
Medicare | 38.4 | % | 41.2 | % | 38.8 | % | 35.9 | % | 42.9 | % | 36.6 | % | 41.2 | % | 37.1 | % | ||||||||||||||||
Medicaid | 42.2 | % | 38.8 | % | 43.3 | % | 36.1 | % | 36.1 | % | 40.2 | % | 36.4 | % | 41.4 | % | ||||||||||||||||
Managed Care Insurance & Other | 17.8 | % | 18.6 | % | 15.7 | % | 23.2 | % | 19.4 | % | 21.7 | % | 19.4 | % | 19.4 | % | ||||||||||||||||
Self-pay | 1.6 | % | 1.4 | % | 2.2 | % | 4.8 | % | 1.6 | % | 1.5 | % | 3.0 | % | 2.1 | % | ||||||||||||||||
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100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||
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The Healthcare Facilities SegmentServices segment in the current year is composed of two nursing homes, one hospital, a subsidiary which provides information technology (“IT”) services to outside customers and SunLink subsidiaries, two leased medical office buildings. During thebuildings, and unimproved land at three and nine months ended March 31, 2016, the segment operated a second hospital on the same site as one of the nursing homes, but closed this hospital in June 2016.locations. Healthcare FacilitiesServices net revenues decreased $2,316increased $156, or 3%, for the three months ended March 31, 20172018 compared to the prior year period. Increased nursing home Medicaid revenues and $7,860decreased provision for bad debts resulted in the increased net revenues. Healthcare Services net revenues decreased $21, or less than 1%, for the nine months ended March 31, 2017,2018 compared to the prior year period primarily as a result of closing a hospital. Netperiod. Decreased nursing home Medicaid revenues, from all payer sourcespartially offset by increased physician clinic and nursing home Medicare revenues, resulted in the decreased compared to last year.net revenues. The net revenues of the Healthcare Facilities SegmentsServices Segment included increases of $38$35 and $385$299 resulting from prior years’ Medicare positive cost report settlements for the three and nine months ended March 31, 20172018, and increases (reductions) of $140$38 and ($662)$385 resulting from prior years’ Medicare positive cost report settlements for the three and nine months ended March 31, 2016.2017.
Pharmacy Segment Net Revenues
Pharmacy Segmentsegment net revenues for the three months ended March 31, 20172018 decreased $311,$438, or 4%5%, from the three months ended March 31, 2016.2017. The decrease was a result of a 10%13% decrease in Retail Pharmacy net revenues, a 3% decrease in Institutional Pharmacy net revenues and a 4% decrease in Durable Medical Equipment (“DME”) and a 6%net revenues. The decrease in Retail Pharmacy net revenues partially offset by a 2% increase in Institutional Pharmacy net revenues. DME net revenues decreasedis primarily due to the negative effectsale of the expansiona retail pharmacy operation in early January 2016 of Medicare Competitive Bidding in its service area. The average net revenue per DME sales order decreased 12% in the current year, primarily due to the Competitive Bidding expansion. The average net revenue per Retail2018. Pharmacy sales order decreased 10% in the current year.
Pharmacy Segmentsegment net revenues for the nine months ended March 31, 20172018 decreased $698,$321, or 3%1%, from the nine months ended March 31, 2016.2017. The decrease was a result of a 10% decrease in Durable Medical Equipment (“DME”) and a 5% decrease in Retail Pharmacy net revenues partially offset byand a 3% increasedecrease in Institutional Pharmacy net revenues partially offset by a 3% increase in DME net revenues. The average net revenue per DME sales order decreased 13% in the current year, primarily due to the Competitive Bidding expansion. The average net revenue per Retail Pharmacy sales order decreased 6% in the current year.
Healthcare Facilities Segment Cost and Expenses
Costs and expenses for our Healthcare Facilities Segment, including depreciation and amortization, were $5,341 and $8,183 for the three months ended March 31, 2017 and 2016, respectively. Costs and expenses for our Healthcare Facilities Segment, including depreciation and amortization, were $15,846 and $26,283 for the nine months ended March 31, 2017 and 2016, respectively.
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Cost and Expenses | ||||||||||||||||
as a % of Net Revenues | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Salaries, wages and benefits | 68.1 | % | 70.1 | % | 64.4 | % | 69.8 | % | ||||||||
Supplies | 8.0 | % | 8.1 | % | 7.8 | % | 9.9 | % | ||||||||
Purchased services | 7.7 | % | 8.2 | % | 7.9 | % | 8.4 | % | ||||||||
Other operating expenses | 14.5 | % | 18.3 | % | 13.3 | % | 17.3 | % | ||||||||
Rent and lease expense | 0.9 | % | 1.2 | % | 0.8 | % | 1.1 | % | ||||||||
Depreciation and amortization expense | 2.9 | % | 2.5 | % | 3.0 | % | 2.3 | % |
All expense categories except depreciation and amortization decreased as a percentage of net revenues for the three months ended March 31, 2017. Depreciation and amortization expense decreased $37 this year. The $2,842 decrease in costs and expenses is due to the closure of one hospital included in the three months ended March 31, 2016. Similarly, all expense categories except depreciation and amortization decreased as a percentage of net revenues for the nine months ended March 31, 2017. Depreciation2018 increased primarily due to increased Medicare reimbursement realized from the implementation of the provisions of the 21st Century Cures Act.The Company expects that the increased revenues from the 21st Century Cures Act will not continue in material amounts this fiscal year. Scripts fulfilled volume has decreased for all Pharmacy Segment product areas for both the three and nine months ended March 31, 2018 compared to the prior year periods.
Healthcare Services Segment Cost and Expenses
Costs and expenses for our Healthcare Services Segment, including depreciation and amortization, expense decreased $48 this year. The $10,437 decrease in costswere $5,543 and $5,647 for the three months ended March 31, 2018 and 2017, respectively. Costs and expenses is due to the closure of one hospital included infor our Healthcare Services segment, including depreciation and amortization, were $16,915 and $16,908 for the nine months ended March 31, 2018 and 2017, respectively.
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Cost and Expenses | ||||||||||||||||
as a % of Net Revenues | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Salaries, wages and benefits | 66.8 | % | 69.0 | % | 67.7 | % | 65.6 | % | ||||||||
Supplies | 7.4 | % | 7.6 | % | 7.5 | % | 7.5 | % | ||||||||
Purchased services | 7.0 | % | 7.0 | % | 6.8 | % | 7.0 | % | ||||||||
EHR incentive payments | 0.0 | % | 0.0 | % | -0.1 | % | 0.0 | % | ||||||||
Other operating expenses | 12.9 | % | 14.9 | % | 13.7 | % | 15.0 | % | ||||||||
Rent and lease expense | 0.9 | % | 0.9 | % | 1.0 | % | 0.7 | % | ||||||||
Depreciation and amortization expense | 3.0 | % | 3.2 | % | 2.8 | % | 3.3 | % |
Salaries, wages and benefits increased as a percent of net revenue for the nine months ended March 31, 2018 due to increased employee medical claims when compared to same period last year, but decreased as a percent of net revenue for the three months ended March 31, 2018 due to better labor management in the nursing homes this year. Supplies and Other operating expenses decreased this year because last year’s expenses included expenses related to a hospital that ceased operations in June 2016. Depreciation and amortization expense decreased $78 for the nine months ended March 31, 2018, as compared to the same period last year as a result of the sale of a medical office building last year.
Pharmacy Segment Cost and Expenses
Cost and expenses for our Pharmacy Segment,segment, including depreciation and amortization, were $8,522$8,127 and $8,509$8,522 for the three months ended March 31, 20172018 and 2016,2017, respectively. Cost and expenses for our Pharmacy Segment,segment, including depreciation and amortization, were $24,457$23,340 and $24,428$24,457 for the nine months ended March 31, 20172018 and 2016,2017, respectively.
Cost and Expenses | Cost and Expenses | |||||||||||||||||||||||||||||||
as a % of Net Revenues | as a % of Net Revenues | |||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Cost of goods sold | 67.4 | % | 66.0 | % | 65.1 | % | 63.2 | % | 65.4 | % | 67.4 | % | 61.9 | % | 65.1 | % | ||||||||||||||||
Salaries, wages and benefits | 22.8 | % | 22.3 | % | 23.4 | % | 22.8 | % | 23.7 | % | 22.8 | % | 22.6 | % | 23.4 | % | ||||||||||||||||
Provision for bad debts | 1.5 | % | 0.8 | % | 1.4 | % | 1.7 | % | 3.0 | % | 1.5 | % | 1.9 | % | 1.4 | % | ||||||||||||||||
Supplies | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | 0.3 | % | 0.4 | % | ||||||||||||||||
Purchased services | 3.5 | % | 3.3 | % | 3.7 | % | 3.5 | % | 3.4 | % | 3.5 | % | 3.5 | % | 3.7 | % | ||||||||||||||||
Other operating expenses | 3.9 | % | 3.4 | % | 3.7 | % | 3.8 | % | 3.9 | % | 3.9 | % | 3.9 | % | 3.7 | % | ||||||||||||||||
Rent and lease expense | 1.0 | % | 0.8 | % | 1.0 | % | 1.0 | % | 1.1 | % | 1.0 | % | 1.1 | % | 1.0 | % | ||||||||||||||||
Depreciation and amortization expense | 3.5 | % | 2.9 | % | 3.4 | % | 2.7 | % | 3.8 | % | 3.5 | % | 3.6 | % | 3.4 | % |
Cost of goods sold as a percent of net revenues increaseddecreased in the three and nine month periodsperiod ended March 31, 20172018 as compared to the comparable periodsperiod of the prior year due to the increased of cost of certain generic drugs and changes in Institutional Pharmacy sales product mix, for the current period.
primarily decreased Institutional Pharmacy revenues, and increased discounts from their venders. Salaries, wages and benefits as a percent of net revenues increased in the three and nine month periodsperiod ended March 31, 20172018 as compared to the comparable periodsperiod of the prior year increased due to the lower net revenues and an actual expense decrease of $32sales in this year’s third fiscal quarter. Provision for bad debts increased for the currentthree months ended March 31, 2018 as compared to last year three month results. Depreciation and amortization expense increased $44 and $145 in the current three and nine month periods, respectively, due to increased depreciation for capitalized rental DME and capitalized leasehold improvements.lower than anticipated collections from private payors.
Operating Profit and Loss
The Company reported an operating loss of $731 for the three months ended March 31, 2018 compared to an operating loss of $771 for the three months ended March 31, 2017 compared to an operating loss of $1,187 for the three months ended March 31, 2016.2017. The operating loss for the three months ended March 31, 2017 decreased2018 compared to the operating loss for the prior year’s three month period resulted fromimproved as a result of increased operating profit of the closure of one hospital in June 2016 which was unprofitable. For the nine months ended March 31, 2017,Healthcare Facilities segment. The Company reported an operating loss of $1,696 was reported compared to an operating loss of $3,615 for the same period last year. Positive adjustments for Medicare cost report adjustments of $385$910 for the nine months ended March 31, 20172018 compared to negative adjustmentsoperating loss of $662$1,696 for the nine months ended March 31, 2016 contributed to the reduction of the2017. The operating loss last year included expenses related to a hospital that ceased operations in the current year’s nine months results compared to the same period last year.June 2016.
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Gain on Sale of Assetseconomic damages claim
The Pharmacy Segment subsidiary asserted claims for economic damages in connection with the Deepwater Horizon Settlement Program related to the event which occurred in 2010. In December 2016,January 2018, these claims were settled and payments of approximately $944 (net of costs and attorneys’ fees) were received. The net settlements are recognized as a subsidiary sold its medical office building complex, comprisedgain in the Condensed Consolidated Statements of landOperations and three buildings in Ellijay, GA (“Ellijay MOB”) for $4,900. A gain of $2,819 was reported on the sale. This property was the collateralComprehensive Earnings (Loss) for the SHPP RDA Loan, which was paid off at the closing of the sale.nine months ended March 31, 2018.
Interest Expense
Interest expense was $129$56 and $211$129 for the three months ended March 31, 2018 and 2017, and 2016, respectively,$302 and $507 and $637 for the nine months ended March 31, 20172018 and 2016,2017, respectively. The decrease in interest expense resulted from lower debt outstanding as the SHPP RDA loan and Carmichael Notes were repaid earlier in the current fiscal year.year, primarily because debt was reduced $3,856 in the nine months ended March 31, 2018 and $3,985 last fiscal year with no additional debt undertaken.
Income Taxes
Income tax benefit of $0 ($0 federal tax and $0 state tax expense) and income tax benefit of $8 ($32 federal tax benefit and $24 state tax expense) and income tax benefit of $1 ($0 federal tax expense and $1 state tax benefit) was recorded for continuing operations for the three months ended March 31, 20172018 and 2016,2017, respectively. Income tax benefit of $296 ($296 federal tax benefit and $0 state tax expense) and income tax benefit of $236 ($221 federal tax benefit and $15 state tax benefit) and income tax expense of $6,851 ($6,210 federal tax expense and $641 state tax expense) was recorded for continuing operations for the nine months ended March 31, 20172018 and 2016,2017, respectively.
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.
The Tax Cut and Jobs Act (“TCJA”) was enacted on December 22, 2017. Under ASC 740, the impact of changes in tax law must be recorded in the financial statements in the reporting period that included the date of enactment. However, the SEC and the FASB both recognize that the magnitude of this law change will require extensive analysis and calculations to conform to the new provisions. The SEC issued Staff Accounting Bulletin (‘SAB” 118) on December 22, 2017. SAB 118 provides registrants with guidance on when and how to report the impact of the law change when not all necessary information is available.
At March 31, 2017,2018, consistent with the above process,processes, we evaluated the need for a valuation allowance against our deferred tax assets and determined that it was more likely than not that noneonly our federal alternative minimum tax (“AMT”) tax credits of our deferred tax assets$296 would be realized. AsThe AMT credit represents a result,provisional amount that will be finalized upon the filing of the Company’s federal income tax return for the year ended June 30, 2017. The filing of this return will occur prior to the Company’s fiscal year end which is within the measurement period. Under TCJA, AMT tax credits will now become refundable in conjunction with the repeal of the corporate AMT. For tax years beginning after December 31, 2017 and before January 1, 2022, the AMT credit is refundable in an amount equal to 50% (100% for the 2021 tax year) of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability. This results in the Company receiving its entire AMT credit of $296 as a refund no later than fiscal 2022 and as such a valuation allowance is no longer needed for the AMT credit carryforward. However, in accordance with ASC 740, we recognized a valuation allowance of $10,206$8,071 against theall other net deferred tax asset so that there is no net long-term deferred income tax asset or liabilityitems at March 31, 2017.2018. We conducted our evaluation by considering available positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. Also, more significant weight was given to evidence that directly related to our current financial performance as compared to less current evidence and future plans.
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The principal negative evidence that led us to determine at March 31, 20172018 that all$8,071 of the net deferred tax assets resulting fromnon-AMT credit carryforwards should have full valuation allowances was the three-year cumulativepre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare FacilitiesServices Segment businesses operate.
For Federal income tax purposes, at March 31, 2017,2018, the Company had approximately $11,100$13,400 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. TheThese net operating loss carryforwards expire in 2024.2025. With the enactment of TCJA, Federal net operating loss carryforwards generated in taxable years ending after December 31, 2017 now have no expiration date.
Gain on Sale of Assets
On January 11, 2018, Carmichael’s Cashway Pharmacy, Inc., a wholly owned subsidiary of the Company, sold the assets of a retail pharmacy operation it operates for approximately $410. Apre-tax gain on the sale of the assets of $183 is included in the results for the three and nine months ended March 31, 2018.
In December 2016, a subsidiary sold a medical office building complex, comprised of land and three buildings in Ellijay, GA (“Ellijay MOB”) for $4,900. A gain of $2,819 was reported on the sale.
Earnings (Loss) from Continuing Operations before Income Tax
Loss from continuing operations before income tax were $898was $604 for the three months ended March 31, 20172018 compared to a loss from continuing operations before income tax of $1,393$898 for the three months ended March 31, 2016. The decreased loss in the three months ended March 31, 2017 when compared to the same quarter last year resulted from the $526 decrease in Healthcare Facilities Segment’s operating loss and lower interest expense.
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Earnings2017. Loss from continuing operations before income tax was $325 for the nine months ended March 31, 2018 compared to earnings from continuing operations before income tax of $573 for the nine months ended March 31, 2017 compared to a2017. The loss from continuing operations before income tax of $4,240 for the nine months ended March 31, 2016. The $2,819 gain on the sale of the Ellijay MOB resulted in earnings from continuing operations for the nine months period ended March 31, 2018 as compared the earnings from continuing operation for the nine month period thislast year results from a significant gain on the sale of assets last year.
Earnings (Loss) After Taxes
Loss from continuing operations were $604 (or a loss of $0.08 per fully diluted share) for the three months ended March 31, 2018 compared to a loss from continuing operations of $890 (or a loss of $0.10 per fully diluted share) for the three months ended March 31, 2017 compared to a2017. The reduced loss from continuing operations of $1,392 (or a loss of $0.15 per fully diluted share) forin the three months ended March 31, 2016. Earnings2018 compared to the same period last year resulted from the gain on the sale of certain retail pharmacy assets in January 2018. Loss from continuing operations were $809 ($0.09$29 (or a loss $0.00 per fully diluted share) for the nine months ended March 31, 20172018 compared to a lossearnings from continuing operations of $11,091$809 (or a loss of $1.17$0.09 per fully diluted share) for the nine months ended March 31, 2016.2017. The losses for the periods ended March 31, 2016 included higher income tax expense due to the need for full valuations for all deferred net tax assets as a result of continuing operating losses.
Loss from discontinued operations were $135 for the three months ended March 31, 2017, compared to a loss from discontinued operations of $443 for the three months ended March 31, 2016. Earnings from discontinued operations were $4,287 (including a gain on sale of Chestatee of $7,270 and income tax expense of $2,650) for the nine months period ended March 31, 2017,2018 as compared to a loss from discontinued operations of $1,758the earnings for the nine months ended March 31, 2016.month period last year results from a significant gain on the sale of assets last year.
Net loss for the three months ended March 31, 20172018 was $588 (or a loss of $0.08 fully diluted share) compared to a net loss of $1,025 (or a loss of $0.11 fully diluted share) compared to net loss of $1,835 (a loss of $0.19 earnings per fully diluted share) for the three months ended March 31, 2016.2017. Net incomeloss for the nine months ended March 31, 20172018 was $5,096$139 (or $0.54a loss of $0.02 fully diluted share) compared to net lossearnings of $12,849 (a loss of $1.36$5,096 ($0.54 earnings per fully diluted share) for the nine months ended March 31, 2017. Net earnings last year included $4,287 of earnings from discontinued operations which primarily resulted from the gain on the sale of a hospital in August 2016.
Adjusted earnings before income taxes, interest, depreciation and amortization
Earnings before income taxes, interest, depreciation and amortization (“EBITDA”) represent the sum of income before income taxes, interest, depreciation and amortization. We understand that certain industry analysts and investors generally consider EBITDA to be one measure of the liquidity of a company, and it is presented to assist analysts and investors in analyzing the ability of a company to generate cash, service debt and meet capital requirements. We believe increased EBITDA is an indicator of improved ability to service debt and to satisfy capital requirements. EBITDA, however, is not a measure of financial performance under accounting principles generally
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accepted in the United States of America and should not be considered an alternative to net income as a measure of operating performance or to cash liquidity. Because EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United States of America and is thus susceptible to varying calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other corporations. Where we adjust EBITDA fornon-cash charges, we refer to such measurement as “Adjusted EBITDA”, which we report on a Company wide basis.Non-cash adjustments in Adjusted EBITDA are not intended to be identified or characterized in any respect as“non-recurring, infrequent or unusual,” if we believe such charge is reasonably likely to recur within two years, or if there was a similar charge (or gain) within the prior two years. Where we report Adjusted EBITDA, we typically also report Healthcare Facilities SegmentServices segment Adjusted EBITDA and Pharmacy Segmentsegment Adjusted EBITDA which is the EBITDA for the applicable segments without any allocation of corporate overhead, which we report as a separate line item, without gains on sales of businesses and without any allocation of thenon-cash adjustments, which we also report as a separate line item in Adjusted EBITDA. Net cash used in operations for the three and nine months ended March 31, 20172018 and 2016,2017, respectively, is shown below.
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Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Healthcare Facilities Adjusted EBITDA | $ | 38 | $ | (452 | ) | $ | 940 | $ | (1,589 | ) | ||||||||||||||||||||||
Healthcare Services Adjusted EBITDA | $ | 281 | $ | 30 | $ | 603 | $ | 709 | ||||||||||||||||||||||||
Pharmacy Adjusted EBITDA | (35 | ) | 246 | 299 | 882 | (70 | ) | (35 | ) | 1,130 | 299 | |||||||||||||||||||||
Corporate overhead costs | (308 | ) | (504 | ) | (1,559 | ) | (1,552 | ) | (478 | ) | (300 | ) | (1,311 | ) | (1,328 | ) | ||||||||||||||||
Taxes and interest expense | (121 | ) | (210 | ) | (271 | ) | (7,488 | ) | (56 | ) | (121 | ) | (6 | ) | (271 | ) | ||||||||||||||||
Othernon-cash expenses and net change in operating assets and liabilities | (659 | ) | 1,550 | (4,408 | ) | 9,456 | 25 | (659 | ) | (449 | ) | (4,408 | ) | |||||||||||||||||||
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Net cash used in operations | $ | (1,085 | ) | $ | 630 | $ | (4,999 | ) | $ | (291 | ) | $ | (298 | ) | $ | (1,085 | ) | $ | (33 | ) | $ | (4,999 | ) | |||||||||
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Liquidity and Capital Resources
Overview
Our primary source of liquidity is unrestricted cash on hand of $11,237$3,541 at March 31, 2017.2018. 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. We nevertheless periodically seek options to obtain financing for the liquidity needs of the Company or individual subsidiaries. The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand and from the sale of assets. See “Subsidiary Loans” below.
The Company believes its Healthcare Facilities Segment and its Pharmacy Segment business continue to underperform. The Company has incurred losses from continuing operations in nine of the last eleven fiscal quarters through the quarter ending March 31, 2017. See the “Business Strategy: Operations, Dispositions and Acquisitions” discussion earlier in this Item 2.
Subject to the risks and uncertainties discussed herein, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months.
Subsidiary Loans
Trace RDA Loan and Trace Working Capital Loan—On July 11, 2012, – Southern Health Corporation of Houston, Inc. (“Trace”), a wholly owned subsidiary of the Company, closed on a $9,975 Mortgage Loan Agreement (“Trace RDA Loan”) and a Working Capital Loan Agreement (which expired on July 2, 2016) with a bank, both dated as of July 5, 2012.
The Trace RDA Loan has a term of 15 years with level monthly payments of principal and interest until repaid. TheOn December 26, 2017, the Fifth Amendment to Loan Agreement, Modification of Note and Waiver (“Modification”) was entered into by Trace and the bank. Under the Modification, Trace made a $3,548 prepayment on the Trace RDA Loan. The monthly principal and interest payments on the RDA Loan bears a floatingwere reduced to $39 per month, the interest rate of interest equalwas reduced to the greater of (i) the prime rate (as published in Thethe Wall Street Journal) plus 1.5%1% with a floor of 5.5%, or (ii) 6% (6.0%(5.75% at March 31, 2017).2018) and certain loan covenants were modified. The Modification also included a waiver of covenant violations for the quarters ended June 30 and September 30, 2017. Trace was in compliance with the amended financial covenants at March 31, 2018. In connection with the modification and prepayment, an existing deposit of $1,000 in a blocked, interest bearing account with the lender was released. The Trace RDA Loan is collateralized by real estate and equipment of Trace in Houston, MS, and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program.
The Trace RDA Loan contains various terms and conditions, including financial restrictions and limitations, and affirmative and negative covenants. The covenants include financial covenants measured on a quarterly basis which require Trace to comply with a ratio of current assets to current liabilities, debt service coverage, fixed charge ratio, and funded debt to EBITDA, all as defined in the Trace RDA Loan. At September 30, 2016 and June 30, 2016, Trace was not in compliance with the debt service coverage, fixed charge ratio and funded debt to EBITDA ratios. The Company received a waiver of thesenon-compliances from the lender for both measurement dates and the Trace RDA Loan was amended by the Fourth Amendment to Loan Agreement and Waiver dated January 6, 2017. Under the Fourth Amendment, the debt service coverage, the fixed charge coverage and funded debt to EBITDA ratios were amended for periods ended December 31, 2016, March 31, 2017 and June 30, 2017 and an additional covenant was entered into requiring the deposit of $1,000 into a blocked interest bearing account with the lender. The deposit, which was made on January 13, 2017, will remain in the blocked account until Trace achieves compliance with financial covenants in effect prior to the Amendment or November 15, 2017, when the modified financial covenants will revert back to thepre-modification amounts. At March 31, 2017, Trace was in compliance with the modified covenants but not the prior covenants. Indebtedness of $7,698 as of June 30, 2016 is presented in current liabilities in the condensed consolidated balance sheet as a result of the financial covenantnon-compliance at that date. The ability of Trace to continue to make
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the required debt service payments under the Trace
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RDA Loan depends on, among other things, its ability to generate sufficient cash, flows, including from operating activities.activities and asset sales. If Trace is unable to generate sufficient cash flow from operations to meet debt service payments on the Trace RDA Loan, including in the event the lender were to declare an event of default and accelerate the maturity of the indebtedness, such failure could have material adverse effects on the Company. The Trace RDA Loan is guaranteed by the Company and one subsidiary.
SHPP RDA Loan—On November 6, 2012, SunLink Healthcare Professional Property, LLC, (“SHPP”), a subsidiary of the Company, entered into and closed on a $2,100 term loan dated as of October 31, 2012 (the “SHPP RDA Loan”) with a bank. On December 16, 2016, SHPP repaid the remaining $1,933 outstanding principal balance of this loan when it sold the collateral for the SHPP RDA Loan, a medical office building located in Ellijay, Georgia. An early repayment penalty of $97 was paid at that date as required by loan terms and $192 of unamortized prepaid loan costs were expensed as of the sale date, both of which were reported as a loss on early repayment of debt of $289 for the nine months ended March 31, 2017.
Carmichael Notes—On April 22, 2008, SunLink Scripts Rx, LLC issued a $3,000 promissory note with an interest rate of 8% to the former owners of Carmichael as part of the acquisition purchase price (the “Carmichael Notes”). The Carmichael Notes, as amended, were payable in semi-annual installments of $185 of principal and plus accrued interest, with the remaining balance of $1,255 due October 22, 2017. Under an agreement dated September 9, 2016, between the Company and the Note holders, the Carmichael Notes balance of $1,508 was paid in full on September 9, 2016 and the accrued interest payable to that date of $46 was forgiven. A gain on retirement of debt of $46 for the nine months ended March 31, 2017 was reported for the accrued interest forgiveness.
Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to outstanding debt,non-cancelable operating leases and interest on outstanding debt from continuing operations at March 31, 20172018 were as follows:
Payments due in: | Long-Term Debt | Operating Leases | Interest on Outstanding Debt | Long-Term Debt | Operating Leases | Interest on Outstanding Debt | ||||||||||||||||||
1��year | $ | 503 | $ | 545 | $ | 396 | ||||||||||||||||||
1 year | $ | 258 | $ | 574 | $ | 172 | ||||||||||||||||||
2 years | 561 | 402 | 400 | 296 | 423 | 173 | ||||||||||||||||||
3 years | 596 | 336 | 366 | 315 | 340 | 155 | ||||||||||||||||||
4 years | 634 | 243 | 323 | 333 | 132 | 136 | ||||||||||||||||||
5+ years | 5,044 | 59 | 808 | 2,145 | 4 | 355 | ||||||||||||||||||
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$ | 7,338 | $ | 1,585 | $ | 2,293 | $ | 3,347 | $ | 1,473 | $ | 991 | |||||||||||||
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At March 31, 2017,2018, we had outstanding long-term debt of $7,338 of which $7,321 was incurred$3,347 under the Trace RDA LoanLoan.
On September 8, 2017, the Georgia Survey agency of the Georgia Department of Community Health (“DCH“) conducted a Complaint Investigation survey to determine whether our nursing home in Ellijay, Georgia was in compliance with federal program requirements for nursing homes participating in Medicare and/or Medicaid programs. As a result of this survey, the nursing home received from the DCH a notice of deficiencies which were identified as posing an immediate jeopardy to resident health and $17safety and which had to be corrected immediately. DCH also notified the nursing home of its intent to recommend civil monetary penalties. In response to the survey findings, the nursing home adopted a succession of plans to remedy the matters identified. On November 6, 2017, DCH advised the nursing home that its latest plan of correction was relatedaccepted and on November 20, 2017, DCH advised the nursing home that it was in substantial compliance with its long-term care requirements. The nursing home will be subject to other debt.future DCH surveys from time to time to evaluate compliance with federal program requirements for nursing homes participating in Medicare and/or Medicaid programs including its continued implementation of the plans of correction. A Civil Money Penalty (“CMP”) was imposed by the Department of Health & Human Services Centers for Medicare and Medicaid Services on January 4, 2018 which resulted in $170 expensed in the nine months ended March 31, 2018. The CMP was paid January 18, 2018.
Discontinued Operations
Chestatee Hospital— – On August 19, 2016, Southern Health Corporation of Dahlonega, Inc., (“Chestatee”), a wholly owned subsidiary of the Company, sold substantially all of the assets and certain liabilities of Chestatee Regional Hospital in Dahlonega, Georgia through an asset purchase agreement for $15,000 subject to adjustment for the book value of certain assets and certain liabilities assumed at the sale date. Thepre-tax gain on sale of $7,270 is subject to adjustment for various purchase price adjustments. A purchase price adjustment of $328 is due to the Company from the hospital buyer as a post-closing adjustments to the purchase price as confirmed by a binding decision of an independent accountant rendered pursuant to the purchase agreement. Chestatee retained certain liabilities, including forcertain employee related liabilities and certain Medicare and Medicaid liabilities, relating to the period it owned and operated the hospital. A portion of the net proceeds werewas used for the repayment of debt. The assets sold and liabilities assumed are shown as assets held for sale in our consolidated balances as of June 30, 2016.
Other Sold Hospitals– Subsidiaries of the Company have sold substantially all of the assets of three hospitals (“Other Sold Hospitals”) during the period July 2, 2012 to December 31, 2014. The lossearnings (loss) before income taxes of the Other Sold Hospitals results primarily from negative prior year Medicare and Medicaid cost report settlements.
Life Sciences and Engineering Segment – SunLink retained a defined benefit retirement plan which covered substantially all of the employees of this segment when the segment was sold in fiscal 1998. Effective February 28, 1997,
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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 ended March 31, 2017 and 2016.
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Related Party Transactions
A director of the Company and the Company’s former corporate secretary are membersis a member of two differenta law firms, each offirm which provides services to SunLink. The Company has expensed an aggregate of $109$25 and $71$109 for legal services to thesethis law firmsfirm in the three months ended March 31, 20172018 and 2016,2017, respectively. The Company has expensed an aggregate of $481$215 and $204$481 for legal services to thesethis law firmsfirm in the nine months ended March 31, 20172018 and 2016,2017, respectively. Included in the Company’s condensed consolidated balance sheets at March 31, 20172018 and June 30, 20162017 is $21$12 and $75,$38, respectively, of amounts payable to thesethis law firms.
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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 Rule13a-15 and Rule15d-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 Rules13a-15(e) and15d-15(e) under the Exchange Act) and the changes in our disclosure controls and procedures during the quarter. Under the direction of our principal executive officer and principal financial officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of March 31, 2017.2018.
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 Form10-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 Form10-Q, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2017.2018.
Changes in Internal Control Over Financial Reporting
There were no changes during the quarter ended March 31, 20172018 in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Items required under Part II not specifically shown below are not applicable.
ITEM 1. | LEGAL PROCEEDINGS |
On September 8, 2017, the Georgia Survey agency of the Georgia Department of Community Health (“DCH“) conducted a Complaint Investigation survey to determine whether our nursing home in Ellijay, Georgia was in compliance with federal program requirements for nursing homes participating in Medicare and/or Medicaid programs. As a result of this survey, the nursing home received from the DCH a notice of deficiencies which were identified as posing an immediate jeopardy to resident health and safety and which had to be corrected immediately. DCH also notified the nursing home of its intent to recommend civil monetary penalties. In response to the survey findings, the nursing home adopted a succession of plans to remedy the matters identified. On November 6, 2017, DCH advised the nursing home that its latest plan of correction was accepted and on November 20, 2017, DCH advised the nursing home that it was in substantial compliance with its long-term care requirements. The nursing home will be subject to future DCH surveys from time to time to evaluate compliance with federal and state program requirements for nursing homes participating in Medicare and/or Medicaid programs including its continued implementation of the plans of correction. A Civil Money Penalty (“CMP”) was imposed by the Department of Health & Human Services Centers for Medicare and Medicaid Services on January 4, 2018 which resulted in $170 expensed in the nine months ended March 31, 2018. The CMP was paid January 18, 2018.
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 Form10-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 Form10-K for the year ended June 30, 2016.2017. While we believe there have been no material changes from the risk factors previously disclosed in such Annual Report except as set forth herein, you should carefully consider, in addition to the other information set forth in this report, the risk factors discussed in our Annual Report which 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 Form10-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:
Exhibits: | ||
31.1 | Chief Executive Officer’s Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934. | |
31.2 | Chief Financial Officer’s Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934. | |
32.1 | Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following materials from the Company’s quarterly report on Form10-Q for the three months ended March 31, |
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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 11, 20172018
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