10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

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

For the transition period from to

Commission File Number 1-12607

SUNLINK HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Georgia

31-0621189

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

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

(Address of principal executive offices)

(Zip Code)

(770) 933-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered Symbol(s)
Common Shares without par value	SSY	NYSE American
Preferred Share Purchase Rights

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (of for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

The number of Common Shares, without par value, outstanding as of November 17, 2023 was 7,040,603.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	September 30,
	2023			June 30,
	(unaudited)			2023
ASSETS
Current Assets:
Cash and cash equivalents	$	2,820		$	4,486
Receivables - net		2,764			2,592
Inventory		1,602			1,628
Current assets held for sale		7,284			1,920
Prepaid expense and other assets		2,061			1,648
Total current assets		16,531			12,274
Property, plant and equipment, at cost		11,718			11,259
Less accumulated depreciation		(8,827	)		(8,542	)
Property, plant and equipment - net		2,891			2,717
Noncurrent Assets:
Intangible asset		1,180			1,180
Noncurrent assets held for sale		0			5,812
Right of use assets		732			798
Other noncurrent assets		389			487
Total noncurrent assets		2,301			8,277
TOTAL ASSETS	$	21,723		$	23,268
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,359		$	1,067
Current maturities of long-term debt		3			14
Accrued payroll and related taxes		853			1,027
Current liabilities held for sale		1,452			1,312
Current operating lease liabilities		335			334
Other accrued expenses		991			1,115
Total current liabilities		4,993			4,869
Long-Term Liabilities
Noncurrent liability for professional liability risks		126			138
Long-term operating lease liabilities		412			481
Noncurrent liabilities held for sale		0			192
Other noncurrent liabilities		113			171
Total long-term liabilities		651			982
Commitments and Contingencies
Shareholders’ Equity
Preferred Shares, authorized and unissued, 2,000 shares		0			0
Common Shares, without par value:
Issued and outstanding, 7,041 shares at September 30, 2023 and 7,032 at June 30, 2023		3,521			3,516
Additional paid-in capital		10,747			10,746
Retained earnings		1,661			3,005
Accumulated other comprehensive income		150			150
Total Shareholders’ Equity		16,079			17,417
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	21,723		$	23,268

See notes to condensed consolidated financial statements.

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
	September 30,
	2023			2022
Net revenues	$	8,555		$	7,449
Costs and Expenses:
Cost of goods sold		4,771			4,369
Salaries, wages and benefits		2,617			2,523
Supplies		34			30
Purchased services		286			250
Other operating expenses		906			533
Rent and lease expense		91			92
Depreciation and amortization		300			269
Operating Loss		(450	)		(617	)
Other Income (Expense):
Gains on sale of assets		2			12
Interest income (expense), net		22			0
Loss from Continuing Operations before income taxes		(426	)		(605	)
Income Tax Expense		2			0
Loss from Continuing Operations		(428	)		(605	)
Loss from Discontinued Operations, net of tax		(916	)		(953	)
Net Loss		(1,344	)		(1,558	)
Other comprehensive income		0			0
Comprehensive Loss	$	(1,344	)	$	(1,558	)
Loss Per Share:
Continuing Operations:
Basic	$	(0.06	)	$	(0.09	)
Diluted	$	(0.06	)	$	(0.09	)
Discontinued Operations:
Basic	$	(0.13	)	$	(0.14	)
Diluted	$	(0.13	)	$	(0.14	)
Net Loss:
Basic	$	(0.19	)	$	(0.22	)
Diluted	$	(0.19	)	$	(0.22	)
Weighted-Average Common Shares Outstanding:
Basic		7,033			6,983
Diluted		7,033			6,983

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Shares				Additional Paid-in Capital		Retained Earnings (Loss)			Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares		Amount
JUNE 30, 2023		7,032	$	3,516	$	10,746	$	3,005		$	150	$	17,417
Share options exercised		9		5		1		0			0		6
Net loss		0		0		0		(1,344	)		0		(1,344	)
SEPTEMBER 30, 2023		7,041	$	3,521	$	10,747	$	1,661		$	150	$	16,079



JUNE 30, 2022		6,954	$	3,478	$	10,736	$	4,800		$	106	$	19,120
Share options exercised		78		38		10		0			0		48
Net earnings		0		0		0		(1,558	)		0		(1,558	)
SEPTEMBER 30, 2022		7,032	$	3,516	$	10,746	$	3,242		$	106	$	17,610

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	September 30,
	2023			2022
Net Cash Used in Operating Activities	$	(1,137	)	$	(1,271	)
Cash Flows Provided by (Used in) Investing Activities:
Expenditures for property, plant and equipment - continuing operations		(476	)		(315	)
Expenditures for property, plant and equipment - discontinued operations		(53	)		(309	)
Proceeds from sale of property, plant and equipment - continuing operations		5			13
Net Cash Used in Investing Activities		(524	)		(611	)
Cash Flows Provided by (Used in) Financing Activities:
Proceeds from share options exercises		6			49
Payments on long-term debt - continuing operations		(11	)		(10	)
Net Cash Provided by (Used in) Financing Activities		(5	)		39
Net Decrease in Cash and Cash Equivalents		(1,666	)		(1,843	)
Cash and Cash Equivalents Beginning of Period		4,486			6,794
Cash and Cash Equivalents End of Period	$	2,820		$	4,951
Supplemental Disclosure of Cash Flow Information:
Cash Paid (Received) for:
Interest	$	(22	)	$	4
Income taxes	$	43		$	0
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities	$	18		$	7

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED SEPTEMBER 30, 2023

(all dollar amounts in thousands except per share amounts)

(Unaudited)

Note 1. –Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements as of September 30, 2023 and for the three month periods ended September 30, 2023 and 2022 have been prepared in accordance with Rule 8-03 and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and, as such, do not include all information required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated June 30, 2023 balance sheet included in this interim filing has been derived from the audited consolidated financial statements at that date but does not include all the information and related notes required by GAAP for complete consolidated financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements included in the SunLink Health Systems, Inc. (“SunLink”, “we”, “our”, “ours”, “us” or the “Company”) Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC on September 28, 2023. In the opinion of management, the Condensed Consolidated Financial Statements, which are unaudited, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the periods indicated. The results of operations for the three month period ended September 30, 2023 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Throughout these notes to the condensed consolidated financial statements, SunLink Health Systems, Inc., and its consolidated subsidiaries are referred to on a collective basis as “SunLink”, “we”, “our”, “ours”, “us” or the “Company.” This drafting style is not meant to indicate that SunLink Health Systems, Inc. or any particular subsidiary of the Company owns or operates any particular asset, business or property. Each operation and business described in this filing is owned and operated by a distinct and indirect subsidiary of SunLink Health Systems, Inc.

Note 2. – Business Operations

The Company’s continuing operations is composed of a Pharmacy business and an information technology (“IT”) business.

The Pharmacy business, is composed of four operational areas conducted in three locations in southwest Louisiana:

· Retail pharmacy products and services, consisting of retail pharmacy sales.

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

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

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

A subsidiary, SunLink Health Systems Technology (“SHST Technology”), provides information technology (“IT”) services to outside customers and to SunLink subsidiaries. The Company also owns a subsidiary which owns approximately twenty-five (25) acres of unimproved land in Ellijay, Georgia.

Series C Redeemable Preferred Shares

On August 2, 2023, the Board of SunLink declared a non-cash dividend per Common Share of one fractional interest in one of the Corporation’s Series C Redeemable Preferred Shares (the “Series C Preferred Shares” and each such fraction of Series C Preferred Share, a “Series C Fractional Interest”). Each of the 7,032 Series C Preferred Share issued was entitled to one million (1,000,000) votes and each Series C Fractional Interest in a Series C Preferred Share accordingly was entitled to one thousand (1,000) votes out of such one million votes. Series C Fractional Interests could not be transferred separately from the Common Shares and were represented by the Common Shares. Each Common Share was entitled to one (1) vote as a Common Share and also one thousand (1,000) votes for the corresponding Series C Fractional Interest thereon, on each matter properly brought before a special shareholders’ meeting which was held on October 19, 2023 and at which the Corporation was reincorporated from the state of Ohio to Georgia (the “Special Meeting”). A further description of the Series C Preferred Shares and the Series C Fractional Interests and the terms and provisions thereof is set forth in the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2023.

COVID-19 Pandemic and CARES Act Funding

COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. The U.S. Department of Health and Human Services ("HHS") declared the end of the COVID-19 pandemic effective May 11, 2023. We believe the effect of the COVID-19 pandemic and its aftermath and certain of the public and certain governmental responses to it have in varying degrees negatively affected of our operations during each of our last fourteen quarters' results.

During the pandemic and its aftermath our Healthcare business experienced material reductions in demand and net revenues. Shortages of and increased costs of certain medical supplies and equipment related to the pandemic as well as increases in the levels of salaries, wages and benefits, have continued adversely to affect our Healthcare businesses. In addition, we experienced loss of some employees, including clinical staff, believed due to, among other things, federally mandated vaccination of healthcare workers against COVID-19.

Our Pharmacy business also experienced reduced sales trends in certain areas, increased costs and reduced staff due to the COVID-19 pandemic and its aftermath as well as material reductions in demand and net revenues. Many of our primary physician referral sources operated at reduced capacity, and not all have resumed operating at full capacity. We believe aftermath of the COVID-19 pandemic continues to negatively to affect the cost of, and result in a lack of inventory for, certain DME products and Retail and Institutional Pharmacy drugs and products. Our Institutional Pharmacy services also experienced increased costs and operational inefficiencies due to measures taken by us and restrictions implemented by our institutional customers in response to the COVID-19 pandemic and its aftermath.

Our Healthcare and Pharmacy segments received approximately $6,182 in general and targeted Provider Relief Funds ("PRF") during the period April 1, 2020 through September 30, 2023 under the CARES Act, which was enacted in March 2020 in response to the COVID-19 pandemic. The PRF distributions have been accounted for as government grants, and a total of $6,162 have been recognized since April l, 2020 as other income under the gain contingency recognition method. As of September 30, 2023 and June 30, 2023, $20 of unearned CARES Act funds is included in other accrued expenses in accompanying condensed consolidated balance sheets.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to employer retention tax credits previously made available under the CARES Act, including modifying and extending the Employee Retention Credit ("ERC") for the six calendar months ending June 30, 2021. As a result of such legislation, the Company qualified for ERC for the first and second calendar quarters of 2021 due to the decrease in its gross receipts and applied for ERC of $3,586 through amended quarterly payroll tax filings for the applicable quarters. As of September 30, 2023, the Company has received all the ERC which we applied for. We continue to monitor compliance with the terms and conditions of the ERC programs and developing interpretations and enforcement of the ERC program rules and the regulations.

continue to monitor compliance with the terms and conditions of such funds received, as well as the impact of the pandemic on our revenues and expenses. If we are unable to attest to or comply with current or future terms and conditions, and there is no assurance we will continue to be able to do so, our ability to retain some or all of such funds received may be impacted, and we may have to return the unutilized portion of those funds, if any, in the future. The Company filed its Schedule of Grant Income of HHS awards and audit report for the year ended June 30, 2021 with the Health Resources and Services Administration (“HRSA”) agency of HHS on September 30, 2022.

Note 3. – Discontinued Operations

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

Sale of Trace Regional Health Systems. Inc –On November 10, 2023, the Company's subsidiary, Crown Healthcare Investments, LLC, signed an agreement with Progressive Health Group, LLC, for the sale of the subsidiary that owns and operates Trace Regional Medical Center, which includes a hospital, a skilled nursing facility and three (3) patient clinics in Houston, MS, for approximately $8,000. The sale is expected to close by December 15, 2023 but is subject to, among other things, the Buyer's satisfactory completion of its due diligence investigation and a number of customary closing conditions.

Sold Hospitals and Nursing Home– Subsidiaries of the Company have sold substantially all the assets of five hospitals (“Sold Facilities”) during the period July 2, 2012 to March 17, 2019. The loss before income taxes of the Sold Facilities results primarily from the effects of retained professional liability insurance and claims expenses and settlement of a lawsuit.

Life Sciences and Engineering Segment —SunLink retained a defined benefit retirement plan which covered substantially all the employees of this segment when the segment was sold in fiscal year 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and related tax benefit or expense is reflected in the results of operations for this segment for the three months ended September 30, 2023 and 2022, respectively.

The components of pension expense for the three months ended September 30, 2023 and 2022, respectively, were as follows:


	Three Months Ended
	September 30,
	2023			2022
Interest cost	$	11		$	13
Expected return on assets		(9	)		(11	)
Amortization of prior service cost		0			0
Net pension expense	$	2		$	2

SunLink contributed $5 to the plan in the three months ended September 30, 2023 and expects to contribute an additional $15 during the last nine months of the fiscal year ending June 30, 2024.

Details of statements of operations from discontinued operations for the three months ended September 30, 2023 and 2022, primarily reflecting the reporting of Trace as discontinued operations as a result of the Company's agreement to sell Trace, which was signed on November 10, 2023, are as follows:


	Three Months Ended
	September 30,
	2023			2022
Net Revenues	$	2,672		$	3,600
Costs and Expenses:
Salaries, wages and benefits		1,898			2,807
Supplies		289			306
Purchased services		706			799
Other operating expenses		528			573
Rent and lease expense		34			26
Depreciation and amortization		133			99
Operating Loss		(916	)		(1,010	)
Other Income (Expense):
Federal stimulus - Provider relief funds		0			61
Interest income (expense), net		0			(4	)
Loss from Discontinued Operations before income taxes		(916	)		(953	)
Income Tax Expense		0			0
Loss from Discontinued Operations, net of tax	$	(916	)	$	(953	)

Details of assets and liabilities held for sale at September 30, 2023 and June 30, 2023, which primarily reflects the reporting of Trace's assets to be sold and liabilities to be assumed in a sale as a result of the Company's November 10, 2023 agreement to sell Trace are as follows:


	September 30,		June 30,
	2023		2023
Receivables - net	$	1,287	$	1,659
Inventory		142		125
Prepaid expense and other assets		136		136
Property, plant and equipment, net		5,484		5,564
Right of use assets		232		246
Noncurrent assets		3		2
Total assets held for sale	$	7,284	$	7,732
Accounts payable	$	854	$	783
Accrued payroll and related taxes		251		361
Current operating lease liabilities		61		61
Other accrued expenses		136		107
Long-term operating lease liabilities		150		192
Total liabilities held for sale	$	1,452	$	1,504

Note 4. – Shareholders’ Equity

Stock-Based Compensation – For the three months ended September 30, 2023 and 2022, the Company recognized no stock-based compensation for options issued to employees and directors of the Company. There were 9,000 shares issued as a result of options exercised during the three months ended September 30, 2023. There were 77,452 shares issued as a result of options exercised during the three months ended September 30, 2022.

Note 5. – Revenue and Accounts Receivable

Revenues by payor were as follows for the three months ended September 30, 2023 and 2022:


	Three Months Ended
	September 30,
	2023		2022
Medicare	$	3,830	$	3,262
Medicaid		1,650		1,604
Retail and Institutional Pharmacy		1,704		1,499
Managed Care & Other Insurance		1,170		873
Self-pay		180		196
Other		21		15
Total Net Revenues	$	8,555	$	7,449

The three months ended September 30, 2023 includes $321 of prior period sales tax refunds.

Accounts Receivable and Allowance for Doubtful Accounts

The Company adopted Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 326, Financial Statements – Credit Losses (“Topic 326”) with an adoption date of July 1, 2023. This standard requires a financial asset (or a group of financial assets) measured at amortized cost basis, to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial assets. The Company evaluates the valuation of accounts receivable concessions allowances based upon its historical collection trends, as well as its understanding of the nature and collectability of accounts based on their age and other factors. The model is based on the credit losses expected to arise over the life of the asset based on the Company’s expectations as of the balance sheet date through analyzing historical customer data as well as taking into consideration current and estimated future economic trends. The Company adopted Topic 326 and determined it did not have a material financial impact.

The roll forward of the allowance for doubtful accounts for the three-months ended September 30, 2023 was as follows:


June 30, 2023 balance	$	532
Concession allowance expense		79
Write-offs		(203	)
September 30, 2023 balance	$	408

Note 6. – Intangible Assets

As of September 30, 2023 and June 30, 2023, intangible assets consist solely of an indefinite-lived trade name of $1,180 under the Pharmacy Segment.

Amortization expense was $0 and $6 for the three months ended September 30, 2023 and 2022, respectively.

Note 7. – Long-Term Debt

Long-term debt consisted of the following:


	September 30, 2023			June 30, 2023
Finance Lease Obligations	$	3		$	14
Less current maturities		(3	)		(14	)
Long-term Debt	$	0		$	0

Note 8. – Income Taxes

Income tax expense of $2 (all state income taxes) was recorded for continuing operations for the three months ended September 30, 2023. No income tax was recorded for continuing operations for the three months ended September 30, 2022.

In accordance with the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 740, we evaluate our deferred taxes quarterly to determine if adjustments to our valuation allowance are required based on the consideration of available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future results of operations, the duration of applicable statuary carryforward periods and conditions of the healthcare industry. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related temporary differences in the financial basis and the tax basis of the assets become deductible. The value of our deferred tax assets will depend on applicable income tax rates.

At September 30, 2023, consistent with the above process, we evaluated the need for a valuation allowance against our deferred tax assets and determined that it was more likely than not that none of our deferred tax assets would be realized. As a result, in accordance with ASC 740, we recognized a valuation allowance of $8,419 against the deferred tax asset so that there is no net long-term deferred income tax asset at September 30, 2023. We conducted our evaluation by considering available positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. A long-term deferred tax liability of $69 is recorded within other noncurrent liabilities in the accompanying condensed consolidated balance sheet of September 30, 2023 to reflect the deferred tax liability for the non-amortizing trade name intangible asset.

The principal negative evidence that led us to determine at September 30, 2023 that all the deferred tax assets should have full valuation allowances was historical tax losses and the projected current fiscal year tax loss. For purposes of evaluating our valuations allowances, the Company’s history of losses represent significant historical negative evidence and we have recognized none of our federal income tax net operating loss carry-forward of approximately $26,541.

For federal income tax purposes, at September 30, 2023, the Company had approximately $26,541 of estimated net operating loss carry-forwards available for use in future years subject to the limitations of the provisions of Internal Revenue Code Section 382. These net operating loss carryforwards expire primarily in fiscal year 2023 through fiscal year 2038; however, with the enactment of the Tax Cut and Jobs Act on December 22, 2017, federal net operating loss carryforwards generated in taxable years beginning after December 31, 2017 now have no expiration date. The Company’s returns for the periods prior to the fiscal year ended June 30, 2020 are no longer subject to potential federal and state income tax examination. Net operating loss carry-forwards generated in tax years prior to June 30, 2020 are still subject to redetermination in potential federal income tax examination.

Note 9. – Leases

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

determining the appropriate lease term. The components of lease cost and rent expense for the three months ended September 30, 2023 and 2022 are as follows:


	Three Months Ended		Three Months Ended
Lease Cost	September 30, 2023		September 30, 2022
Operating lease cost:
Operating lease cost	$	85	$	85
Short-term rent expense		5		6
Variable lease cost		1		1
Total operating lease cost	$	91	$	92

Finance lease cost:
Amortization of right-of-use assets	$	9	$	9
Interest on finance lease liabilities		0		1
Total finance lease cost	$	9	$	10

Supplemental balance sheet information relating to leases was as follows:


		As of		As of
		September 30,		June 30,
		2023		2023
Operating Leases:	Balance Sheet Classifications
Operating lease ROU Assets	ROU Assets	$	732	$	798

Finance Leases:
Finance lease ROU Assets	Property, plant and equipment		203		203
Accumulated amortization	Accumulated depreciation		138		130
Current finance lease liabilities	Current maturities of long-term debt		3		14

Supplemental cash flow and other information related to leases as of and for the three months ended September 30, 2023 and 2022 are as follows:


	Three Months Ended
Other information	September 30, 2023			September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	85		$	85
Operating cash flows from finance leases		0			1
Financing cash flow from finance leases		10			10
Right-of-use assets obtained in exchange for new operating lease liabilities		18			7
Weighted-average remaining lease term:
Operating leases	2.29 years			3.19 years
Finance leases	.16 years			1.16 years
Weighted-average discount rate:
Operating leases		0.99	%		1.03	%
Finance leases		6.54	%		6.54	%

Commitments relating to non-cancellable operating and finance leases as of September 30, 2023 for each of the next five years and thereafter are as follows:


Payments due within	Operating Leases			Finance Leases
1 year	$	341		$	4
2 years		318			0
3 years		91			0
4 years		6			0
5 years		1			0
Over 5 years		0			0
Total minimum future payments		757			4
Less: Imputed interest		(10	)		(1	)
Total liabilities		747			3
Less: Current portion		(335	)		(3	)
Long-term liabilities	$	412		$	0

Note 10. – Sales Tax Payable

During the fiscal year ended June 30, 2019, the Pharmacy segment business amended its sales tax position with four different taxing authorities to avail its business of exemptions from state and local sales taxes in Louisiana on revenues from the sales of products and services to beneficiaries of government insurance programs to the extent reimbursed by the administrators of such programs. No such sales taxes for any period subsequent to June 30, 2019 have been paid on the related reimbursement received from the government insurance payers’ programs with respect to sales of such products and services. The Company has filed amended sales tax returns for periods still open under the applicable statutes of limitations claiming refunds of such sales taxes paid. Refunds have been received from three taxing authorities in the amounts claimed on amended returns and a settlement was reached with one taxing authority to offset future sales tax payable. Amounts claimed and received from two taxing authorities providing refunds were recorded as revenues in the fiscal year ended June 30, 2020 in the amount of $359. During the three months ended September 30, 2023, the Company recorded a refund receivable of $321 as revenue for a sales tax refund which was received in October, 2023. Also in October 2023, a settlement was reached with the last unsettled sales tax refund for $150 to offset future sales tax payable. This settlement will be recorded as sales tax credits are used to reduce current sales tax payable.

In addition, until October 1, 2022, the Company accrued as payable amounts for sales tax estimates from these taxing authorities in amounts management believed would be payable if the Company's position did not prevail. During the three months ended December 31, 2022, after discussions with the taxing authorities and external legal counsel, the Company determined that it was more likely than not that its position could be sustained going forward and accrued but unpaid sales tax would not be payable. Based on this determination, the Company reversed $2,615 of accrued sales tax during the three months ended December 31, 2022 as an increase of net revenues.

Note 11. – Commitments and Contingencies

Contractual obligations, commitments and contingencies related to outstanding debt and interest (excluding operating leases, see Note 9) in continuing operations at September 30, 2023 were as follows:


Payments due within:	Long-Term Debt		Interest on Outstanding Debt
1 year	$	3	$	1
2 years		0		0
3 years		0		0
4 years		0		0
5 years		0		0
	$	3	$	1

Note 12. – Related Party Transactions

A director of the Company is senior counsel in a law firm which provides services to SunLink. The Company expensed an aggregate of $187 and $55 for legal services to this law firm in the three months ended September 30, 2023 and 2022, respectively. Included in the Company’s condensed consolidated balance sheets at September 30, 2023 and June 30, 2023 is outstanding legal expenses to this firm $185 and $36, respectively,

Note 13. – Subsequent Events

Sale of Trace Regional Health Systems –On November 10, 2023, the Company's subsidiary, Crown Healthcare Investments, LLC, signed an agreement with Progressive Health Group, LLC, for the sale of the subsidiary that owns and operates Trace Regional Medical Center, which includes a hospital, a skilled nursing facility and three (3) patient clinics in Houston, MS, for approximately $8,000. The sale is expected to close no later than December 15, 2023 but is subject to, among other things, the Buyer's satisfactory completion of its due diligence investigation and a number of customary closing conditions. The Company expects to recognize a gain on the sale of Trace in discontinued operations in the quarter ending December 31, 2023.

State of incorporation change– On October 19, 2023, a special shareholders' meeting of the Company was held at which shareholder approval of the Company's reincorporation from the state of Ohio to Georgia was approved.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share and admissions data)

Forward-Looking Statements

This Quarterly Report and the documents that are incorporated by reference in this Quarterly Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as “may,” “believe,” “will,” “seeks to”, “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on the current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. Throughout this annual report and the notes to the condensed consolidated financial statements, SunLink Health Systems, Inc., and its consolidated subsidiaries are referred to on a collective basis as “SunLink”, “we”, “our”, “ours”, “us” or the “Company.” This drafting style is not meant to indicate that SunLink Health Systems, Inc. or any particular subsidiary of SunLink Health Systems, Inc. owns or operates any asset, business, or property. Healthcare services, pharmacy operations and other businesses described in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors that could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance, and achievements to differ materially from those anticipated, include, but are not limited to:

General Business Conditions

•

general economic and business conditions in the U.S., both nationwide and in the states in which we operate;

•

the continuing after-effects of the COVID-19 pandemic, both nationwide and in the states in which we operate, including among other things, on demand for our customary services, the efficiency of such services, availability of staffing, availability of supplies, costs and financial results. Future COVID-19, its variants or other pandemics of other contagious diseases could result in the unavailability of personnel to provide services, regulatory bans on certain services or admissions, decreased occupancy levels, increase costs, reduce our revenues and otherwise adversely affect our business;

•

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

•

demographic characteristics and changes in areas where we operate, including resistance to vaccination for COVID-19 and/or its variants;

•

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

•

changes in accounting principles generally accepted in the U.S.;

•

the impact of inflation on our patients, operating costs, ability and feasibility of raising funds, and on our ability to achieve cash flow and profitability, including our inability to cover cost increases because most of our revenue is from government programs whose payments are fixed; and

•

fluctuations in the market value of equity securities including SunLink common shares, including fluctuations based on actual or feared inflation or recession.

Operational Factors

•

the ability or inability to operate profitably in one or more segments of the healthcare business;

•

the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, nurses, pharmacists, and staff personnel for our operations;

•

timeliness and amount and conditions of reimbursement payments received under government programs;

•

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

•

the ability to achieve compliance with requirements of the expenditure and retention of Provider Relief Funds (“PRF”);

•

the ability or inability to fund our obligations under capital leases or new or existing obligations and/or any existing or potential defaults under existing indebtedness;

•

restrictions imposed by existing or future contractual obligations including existing or new indebtedness;

•

the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general, employment, fiduciary, other liability insurance and changes in estimates of our self-insurance claims and reserves;

•

the efforts of governmental authorities, insurers, healthcare providers, and others to contain and reduce healthcare costs;

•

the impact on hospital, clinic, and nursing home services of the treatment of patients in alternative or lower acuity healthcare settings, such as with drug therapy, in surgery centers, and urgent care centers, retirement homes or at home;

•

changes in medical and other technology;

•

increases in prices of materials and services utilized in our Healthcare Services and Pharmacy segments;

•

increases in wages as a result of inflation or competition for physician, nursing, pharmacy, management, and staff positions;

•

any impairment in our ability to collect accounts receivable, including deductibles and co-pay amounts;

•

the functionality of or costs with respect to our information systems for our Healthcare Services and Pharmacy segments and our corporate office, including both software and hardware;

•

the availability of and competition from alternative drugs or treatments to those provided by our Pharmacy segment; and

•

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

Liabilities, Claims, Obligations and Other Matters

•

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

•

potential adverse consequences of any known and unknown government investigations;

•

claims for medical malpractice product, environmental or other liabilities from continuing and discontinued operations;

•

professional, general, and other claims which may be asserted against us, including claims based on a failure currently unknown to us of our physicians and other personnel to comply with COVID-19 vaccination mandates;

•

potential damages and consequences of natural disasters and weather-related events such as tornados, earthquakes, hurricanes, flooding, snow, ice and wind damage, and population evacuations affecting areas in which we operate; and

•

potential adverse contingencies of terrorist acts, crime or civil unrest.

Regulation and Governmental Activity

•

negative consequences of existing and proposed governmental budgetary constraints or modification or termination of existing government programs or the implementation and related costs and disruptions of new government programs such as environmental, social and governance programs;

•

negative consequences of Federal and state insurance exchanges and their rules relating to reimbursement terms;

•

the continuing decision by Mississippi (where we operate our remaining hospital and nursing home) to not expand Medicaid;

•

the regulatory environment for our businesses, including state certificate of need laws and regulations, pharmacy licensing laws and regulations, rules and judicial cases relating thereto, including proposed nursing home minimum staffing requirements;

•

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

•

the failure of government and private reimbursement to cover our increasing costs;

•

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

•

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

Dispositions, Acquisition and Renovation Related Matters

•

the ability to dispose of underperforming facilities, underperforming business segments and surplus assets on acceptable terms;

•

the availability of cash and the terms of borrowed or equity capital to fund acquisitions or replacement facilities, improvements or renovations to existing facilities or both; and

•

competition in the market for acquisitions of hospitals, rehabilitation centers, nursing homes, pharmacy facilities, and other healthcare businesses.

The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could be additional factors besides those listed herein that also could affect SunLink in an adverse manner. You should read this Quarterly Report completely and with the understanding that 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.

Business Strategy: Operations, Dispositions and Acquisitions

The Board of Directors of SunLink believes the Company needs to expand if it is to continue as a public corporation and should therefore, among other things: (i) actively pursue one or more extraordinary corporate transactions to expand the Company's business, any of which transactions may involve a merger or consolidation with a compatible third party, as a result of which the Company may or may not be in the majority, (ii) continue the Company's business strategy to focus its efforts on improving its operations and services generally and achieving and maintaining profitability in its existing Pharmacy business, which may include selective acquisitions, subject to available capital, or dispositions of underperforming subsidiaries or facilities and (iii) effect corporate governance changes which were approved at the Special Meeting of Shareholders held on October 19, 2023, which approved reincorporation in Georgia with governing documents which provide for majority shareholder voting to better enable the Company to pursue any such extraordinary corporate transaction which may be judged favorable to the Company and its shareholders. On November 10, 2023, the Company's subsidiary, Crown Healthcare Investments, LLC, signed an agreement with Progressive Health Group, LLC, for the sale of the subsidiary that owns and operates Trace Regional Medical Center, which includes a hospital, a skilled nursing facility and three (3) patient clinics in Houston, MS, for approximately $8,000. The sale is expected no later than December 15, 2023 but is subject to, among other things, the Buyer's satisfactory completion of its due diligence investigation and a number of customary closing conditions.

The Company expects to use existing cash primarily to sustain its operations, and to fund activities related to such extraordinary transactions when available and appropriate, and for other general corporate purposes. The Company believes certain portions of its businesses continue to under-perform and the Company periodically entertains overtures for the sale of one or more of its businesses when deemed appropriate, including to better position the company for an extraordinary corporate business transaction such as a merger or consolidation.

In connection with a Special Meeting of Shareholders to reincorporate in Georgia and approve majority voting, a total of 7,032 Series C Preferred Shares were issued, each entitled to one million (1,000,000) votes and in turn each Series C Fractional Interest in such a Series C Preferred Share was issued for each Common Share of the Company and accordingly was entitled to one thousand (1,000) votes out of such one million votes of the corresponding Series C Preferred. Series C Fractional Interests could not be transferred separately from the Common Shares and were represented by the Common Shares. Each Common Share was entitled to one (1) vote as a Common Share and also one thousand (1,000) votes for the corresponding Series C Fractional Interest thereon, on each matter properly brought before the special shareholders’ meeting which was held on October 19, 2023 and at which shareholder approval of the Company's reincorporation from the state of Ohio to Georgia (the “Special Meeting”). A further description of the Series C Preferred Shares and the Series C Fractional Interests and the terms and provisions thereof is set forth in the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2023.

There is no assurance that any strategic transaction will be authorized by the Company's Board of Directors or, if authorized, that any such transaction will be completed.

COVID-19 Pandemic and CARES Act Funding

COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. The U.S. Department of Health and Human Services ("HHS") declared the end of the COVID-19 pandemic effective May 11, 2023.We believe the effect of the COVID-19 pandemic and its aftermath and certain of the public and certain governmental responses to it have in varying degrees negatively affected each of our last fourteen (14) quarter’s results.

During the pandemic and its aftermath our Healthcare business experienced material reductions in demand and net revenues. Shortages of and increased costs of certain medical supplies and equipment related to the pandemic as well as increases in the levels of salaries, wages and benefits, have continued to adversely to affect our Healthcare businesses. In addition, we experienced loss of some employees, including clinical staff, believed due to, among other things, federally mandated vaccination of healthcare workers against COVID-19.

Our Pharmacy business also experienced reduced sales trends in certain areas, increased costs and reduced staff due to the COVID-19 pandemic and its aftermath as well as material reductions in demand and net revenues. Many of our primary physician referral sources operated at reduced capacity, and not all have resumed operating at full capacity. We believe the aftermath of the COVID-19 pandemic continues negatively to affect the cost of, and result in a lack of inventory for, certain DME products and Retail and Institutional Pharmacy drugs and products. Our Institutional Pharmacy services also experienced increased costs and operational inefficiencies due to measures taken by us and restrictions implemented by our institutional customers in response to the COVID-19 pandemic and its aftermath.

Our Healthcare and Pharmacy segments have received approximately $6,182 in general and targeted Provider Relief Funds ("PRF") during the period April 1, 2020 through September 30, 2023 under the CARES Act, which was enacted in March 2020 in response to the COVID-19 pandemic. The PRF distributions have been accounted for as government grants, and a total of $6,162 have been recognized since April l, 2020 as other income under the gain contingency recognition method. As of September 30, 2023 and June 30, 2023, $20 of unearned CARES Act funds is included in other accrued expenses in accompanying condensed consolidated balance sheets.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to employer retention tax credits previously made available under the CARES Act, including modifying and extending the Employee Retention Credit ("ERC") for the six calendar months ending June 30, 2021. As a result of such legislation, the Company qualified for ERC for the first and second calendar quarters of 2021 due to the decrease in its gross receipts and applied for ERC of $3,586 through amended quarterly payroll tax filings for the applicable quarters. As of September 30, 2023, the Company has received all of the ERC which we applied for. We continue to monitor compliance with the terms and conditions of the ERC program and developing interpretations and enforcement of the ERC program rules and the regulations.

PRF distributions and other grants received during the pandemic are subject to Federal audits and Single Audits and not subject to repayment provided we are able to attest to and comply with the terms and conditions of the funding, including demonstrating that the funds received have been used for designated, allowable healthcare-related expenses and capital expenditures attributable to COVID-19 and for "Lost Revenues" as defined by the department of “HHS”. We continue to monitor compliance with the terms and conditions of such funds received, as well as the impact of the pandemic on our revenues and expenses. If we are unable to attest to or comply with current or future terms and conditions, and there is no assurance we will continue to be able to do so, our ability to retain some or all of such funds received may be impacted, and we may have to return the unutilized portion of those funds, if any, in the future. The Company filed its Schedule of Grant Income of HHS awards and audit report for the year ended June 30, 2021 with the Health Resources and Services Administration (“HRSA”) agency of HHS on September 30, 2022.

Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made; and changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.

Our critical accounting estimates are more fully described in our 2023 Annual Report on Form 10-K and continue to include the following areas: receivables – net and provision for doubtful accounts; revenue recognition and net patient service revenues; goodwill, intangible assets and accounting for business combinations; professional and general liability claims; and accounting for income taxes. There have been no material changes in our critical accounting estimates for the periods presented other than amounts readily computable from the financial statements included in this form 10-Q.

Financial Summary

Results of Operations

The Company’s operations for the three months ended September 30, 2023 continued to be negatively impacted by the effects of the aftermath of the COVID-19 pandemic, although mitigated somewhat from prior quarters, including

among other factors, difficulty hiring qualified employees, rising labor and supply costs and supply chain challenges resulting in inability to obtain pharmacy and DME products on a timely, cost effective basis.


	Three Months Ended
	September 30,
	2023			2022			% Change
Net Revenues	$	8,555		$	7,449			14.8	%
Costs and expenses		(9,005	)		(8,066	)		11.6	%
Operating loss		(450	)		(617	)		(27.1	)%
Interest income (expense) - net		22			0		NA
Gain on sale of assets		2			12		NA
Loss from continuing operations before income taxes	$	(426	)	$	(605	)		(29.6	)%

Our net revenues are from two businesses, pharmacy and a subsidiary which provides information technology services to outside customers and SunLink subsidiaries. The Company’s revenues by payor were as follows for the three months ended September 30, 2023 and 2022:


	Three Months Ended
	September 30,
	2023		2022
Medicare	$	3,830	$	3,262
Medicaid		1,650		1,604
Retail and Institutional Pharmacy		1,704		1,499
Managed Care & Other Insurance		1,170		873
Self-pay		180		196
Other		21		15
Total Net Revenues	$	8,555	$	7,449

Pharmacy net revenues for the three month period ended September 30, 2023 increased $1,122 or 16% from the three month period ended September 30, 2022. The increased net revenues include the recognition of prior periods' accrued sales tax refund of $321, increased retail and institutional scripts filled and increased durable medical equipment revenue per order in the three months ended September 30, 2023.

Institutional pharmacy sales increased 2% for the three month period ended September 30, 2023 from the prior year period primarily due to a 3% increase in per script net revenues and 9% increase in scripts filled. Durable Medical Equipment (“DME”) pharmacy sales increased 10% for the three month period ended September 30, 2023 from the prior year period primarily due to an 26% increase in per order net revenues. Retail pharmacy sales decreased 3% for the three month period ended September 30, 2023 from the prior year period.

Costs and expenses, including depreciation and amortization, were $9,005 and $8,066 for the three months ended September 30, 2023 and 2022, respectively.


	Cost and Expenses as a % of Net Revenues
	Three Months Ended
	September 30,
	2023			2022
Cost of goods sold		55.8	%		58.7	%
Salaries, wages and benefits		30.6	%		33.9	%
Supplies		0.4	%		0.4	%
Purchased services		3.3	%		3.4	%
Other operating expenses		10.6	%		7.2	%
Rent and lease expense		1.1	%		1.2	%
Depreciation and amortization expense		3.5	%		3.6	%

Cost of goods sold and salaries, wages and benefits for the three months ended September 30, 2023 as a percent of net revenues compared to the prior year quarter decreased primarily due the recognition of prior periods' accrued sales tax refund of $321 in the three months ended September 30, 2023. Other operating expenses for the three months ending September 30, 2023 increased from the prior year's comparable quarter primarily due to increased legal expenses relating to the change in state of incorporation from Ohio to Georgia, which was finalized in October 2023 and decrease equity method income from investment in a minority-owned subsidiary.

Operating Loss

The Company reported an operating loss of $450 for the three months period ended September 30, 2023 compared to operating losses of $617 for the three months period ended September 30, 2022. The $167 decreased operating loss for the three months ended September 30, 2023 compared to the three months period ended September 30, 2022 resulted from the 15% increase in net revenues this year.

Income Taxes

Loss from Continuing Operations after Income Taxes

The loss from continuing operations after income tax was $428 for the three months ended September 30, 2023 as compared to a loss from continuing operations after income tax of $605 for the three months ended September 30, 2022. The decreased loss from continuing operations in the current year resulted primarily from the increased net revenues of the Pharmacy business.

Loss from Discontinued Operations after Income Taxes

The loss from discontinued operations after income taxes was $916 for the three month period ended September 30, 2023 compared to a loss from discontinued operations after income taxes of $953 for the three month period ended September 30, 2022. The decrease loss from discontinued operations after income tax this year resulted from slightly improved results of Trace.

Discontinued Operations

Sale of Trace Regional Health Systems. Inc –On November 10, 2023, the Company's subsidiary, Crown Healthcare Investments, LLC, signed an agreement with Progressive Health Group, LLC, for the sale of the subsidiary that owns and operates Trace Regional Medical Center, which includes a hospital, a skilled nursing facility and three (3) patient clinics in Houston, MS, for approximately $8,000. The sale is expected to close no later than December 15, 2023 but is subject to, among other things, the Buyer's satisfactory completion of its due diligence investigation and a number of customary closing conditions.

Sold Hospitals and Nursing Home – Subsidiaries of the Company have sold substantially all the assets of five hospitals (“Sold Facilities”) during the period July 2, 2012 to March 17, 2019. The loss before income taxes of the Sold Facilities results primarily from the effects of retained professional liability insurance and claims expenses and settlement of a lawsuit.

Life Sciences and Engineering Segment — SunLink retained a defined benefit retirement plan which covered substantially all the employees of this segment when the segment was sold in fiscal year 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and related tax benefit or expense is reflected in the results of operations for this segment for the three months ended September 30, 2023 and 2022, respectively.

Net Loss

Net loss for the three months period ended September 30, 2023 was $1,344 (or a loss of $0.19 per fully diluted share) as compared to a net loss of $1,558 (or a loss of $0.22 per fully diluted share) for the three months period ended September 30, 2022.

Liquidity and Capital Resources

Overview

Our primary source of liquidity is unrestricted cash on hand, which was $2,820 at September 30, 2023. The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand. From time-to-time, we may, nevertheless, seek to obtain financing for the liquidity needs of the Company or individual subsidiaries based on anticipated need. However, currently, the Company’s ability to raise capital (debt or equity) in the public or private markets on what it considers acceptable terms is uncertain. On November 10, 2023, the Company's subsidiary, Crown Healthcare Investments, LLC, signed for the sale of the subsidiary that owns and operates Trace Regional Medical Center, which includes a hospital, a skilled nursing facility and three (3) patient clinics in Houston, MS, for approximately $8,000. The sale is expected close no later than December 15, 2023 but is subject to, among other

things, the Buyer's satisfactory completion of its due diligence investigation and a number of customary closing conditions.

CARES Act Funds - The CARES Act was enacted by the U.S. government on March 27, 2020 provided the relief to health care providers under the CARES Act in the form of grants under PRF and forgivable loans under PPP. We received a total of $9,416 under the CARES Act programs consisting of $6,182 in general and targeted PRF and $3,234 of PPP loans. During the first two calendar quarters of 2021, the Company became eligible for, and we applied for $3,586 of ERC through amended quarterly payroll tax filings, all of which the Company has received as of the date of this filing.

Subject to the effects, risks and uncertainties associated with the aftermath of the COVID-19 pandemic and our ability to retain the CARES funds described above, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months.

Contractual Obligations, Commitments and Contingencies

Contractual obligations, commitments and contingencies related to outstanding debt, noncancelable operating leases and interest on outstanding debt from continuing operations at September 30, 2023 were as follows:


Payments due within:	Long-Term Debt		Operating Leases		Interest on Outstanding Debt
1 year	$	3	$	341	$	1
2 years		0		318		0
3 years		0		91		0
4 years		0		6		0
5 years		0		1		0
Over 5 years		0		0		0
	$	3	$	757	$	1

As of September 30, 2023, we had outstanding debt of $3 of finance lease debt.

The Company currently expects to purchase approximately $800 of capitalizable DME by the Pharmacy segment (to be rented to customers) during the next twelve months. The timing and actual amount which will be expended is difficult to predict due to various factors including varying demand for such equipment as well as its availability given current supply sourcing challenges. Other capital expenditures for replacement and upgrade of current facilities and equipment of the Pharmacy business may be needed during the next twelve months although there is no estimate of those expenditures other than being expected to be at a lower level than fiscal years 2023 and 2022. The Company anticipates funding such expenditures primarily from cash on hand. Other cash expenditures for the next twelve months currently are expected to be in-line with expenditures for the three months ended September 30, 2023, subject to further operating and administrative cost increases, and other settlements of cost reports and other liabilities in the ordinary course of business, and the Company’s ability to retain unrecognized CARES Act grants, PPP funds and ERC funds received or previously received. Other than reported above, there have been no material changes outside the ordinary course of business relating to our upcoming cash obligations which have occurred during the three months ended September 30, 2023. Other than with respect to scheduled cash expenditures (based on current operating levels) for long-term debt, operating leases, and interest on current outstanding debt, the debt, the specific items previously disclosed here, as well as continued uncertainties relating to the aftermath of the COVID-19 pandemic, the Company is currently unaware of other trends or unusual uncertainties that are likely to cause a material change in its cash expenditures in periods beyond the next twelve months. See Notes 7, 9, 10, and 11 to our financial statements. The Company is also unaware of events that are reasonably likely to cause a material change in the relationship between its costs and revenues (such as known or reasonably likely future increases in costs of labor or materials, price increases or inventory adjustments, beyond those discussed herein); however, we are unable to predict with any degree of accuracy when, or the extent to which, recent inflationary price trends, labor disruptions and supply chain challenges experienced in 2021, 2022 and 2023 to date will mitigate. In addition, on November 10, 2023, the Company's subsidiary, Crown Healthcare Investments, LLC, for the sale of the subsidiary that owns and operates Trace Regional Health System which includes a hospital, skilled nursing facility and three (3) clinics in Houston, MS for approximately $8,000. The sale is

scheduled to close on December 15, 2023 subject to, among other things, the Buyer's satisfactory completion of its due diligence investigation and a number of customary closing conditions.

Related Party Transactions

A director of the Company is senior counsel of a law firm which provides services to SunLink. The Company expensed an aggregate of $187 and $55 for legal services to this law firm in the three months ended September 30, 2023 and 2022, respectively. Included in the Company’s condensed consolidated balance sheets at September 30, 2023 and June 30, 2023 outstanding legal expenses to this law firm of $185 and $36, respectively,

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments (such as investments and borrowings) and interest rate risk is not material.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) and the changes in our disclosure controls and procedures during the quarter. Under the direction of our chief executive officer and chief financial officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of September 30, 2023.

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

Based on an evaluation of the effectiveness of disclosure controls and procedures performed in connection with the preparation of this Form 10-Q, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023. The effect, if any, of the COVID-19 pandemic on the effectiveness of current disclosure controls and procedures in future periods is uncertain and we intend to revise the same, if any, and to the extent deemed appropriate.

Changes in Internal Control Over Financial Reporting

There were no changes during the quarter ended September 30, 2023 in our internal control over financial reporting that materially affected, or is believed likely to materially affect, our internal controls over financial reporting. Notwithstanding staff absences and turnover and challenges hiring new and replacement staff, including in our financial departments, to date, we do not believe the COVID-19 pandemic has had any material effect on the effectiveness of our disclosure controls and procedures, however we cannot assure you that our internal controls will not be affected in the case of other or recurrent pandemics.

PART II. OTHER INFORMATION

Items required under Part II not specifically shown below are not applicable.

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Risk Factors Relating to an Investment in SunLink

Information regarding risk factors appears in “MD&A – Forward-Looking Statements,” in Part I – Item 2 of this Form 10-Q and in “MD&A - Risks Factors Relating to an Investment in SunLink” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2023. We believe there have been no material changes from the risk factors previously disclosed in such Annual Report except as set forth herein.

In addition to the matters set forth herein, the reader should carefully consider, in addition to the other information set forth in this report, the risk factors discussed in our Annual Report that could materially affect our business, financial condition or future results. Such risk factors are expressly incorporated herein by reference. The risks described in our Annual Report are not the only risks facing our Company. In addition to risks and uncertainties inherent in forward-looking statements contained in this Report on Form 10-Q, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Whenever we refer to “SunLink,” “Company”, “we," "our,” or “us” in this Item 1A, we mean SunLink Health Systems, Inc. and its subsidiaries, unless the context suggests otherwise.

ITEM 6. EXHIBITS

Exhibits:


10.1		Stock purchase agreement by and between Crown Healthcare Investments, LLC (Seller) and Progressive Health Group, LLC ("Buyer")
31.1		Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

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

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

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

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023, formatted in iXBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and June 30, 2023, (ii) Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) for the three months ended September 30, 2023 and 2022 (unaudited), (iii) Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2023 and 2022 (unaudited), and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text.


104		Cover Page Interactive Data File (formatted as Inline XRBL with the applicable taxonomy extension information in Exhibit 101.)

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: November 17, 2023