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, 2024

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 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

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.

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☐

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

Indicate by check mark whether the registrant 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 12, 2024 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,
		2024				June 30,
		(unaudited)				2024
ASSETS
Current Assets:
Cash and cash equivalents		$	7,529			$	7,170
Receivables - net			3,011				3,371
Inventory			1,547				1,553
Current assets held for sale			1,915				1,959
Prepaid expense and other assets			1,614				1,611
Total current assets			15,616				15,664
Property, plant and equipment, at cost			12,498				12,683
Less accumulated depreciation			(10,182	)			(9,874	)
Property, plant and equipment - net			2,316				2,809
Noncurrent Assets:
Intangible asset			1,180				1,180
Right of use assets			473				516
Other noncurrent assets			44				443
Total noncurrent assets			1,697				2,139
TOTAL ASSETS		$	19,629			$	20,612
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	1,338			$	1,905
Accrued payroll and related taxes			1,351				955
Current operating lease liabilities			339				331
Other accrued expenses			823				1,022
Total current liabilities			3,851				4,213
Long-Term Liabilities
Noncurrent liability for professional liability risks			139				49
Long-term operating lease liabilities			146				197
Other noncurrent liabilities			69				180
Total long-term liabilities			354				426
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, 2024 and 7,041 at June 30, 2024			3,521				3,521
Additional paid-in capital			10,747				10,747
Retained earnings			929				1,478
Accumulated other comprehensive income			227				227
Total Shareholders’ Equity			15,424				15,973
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	19,629			$	20,612

 

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,
		2024				2023
Net revenues		$	7,923			$	8,555
Costs and Expenses:
Cost of goods sold			4,475				4,771
Salaries, wages and benefits			3,078				2,617
Supplies			34				34
Purchased services			319				286
Other operating expenses			804				906
Rent and lease expense			94				91
Depreciation and amortization			313				300
Operating Loss			(1,194	)			(450	)
Other Income (Expense):
Gains on sale of assets			694				2
Interest income, net			58				22
Loss from Continuing Operations before income taxes			(442	)			(426	)
Income Tax Expense			0				2
Loss from Continuing Operations			(442	)			(428	)
Loss from Discontinued Operations, net of tax			(107	)			(916	)
Net Loss			(549	)			(1,344	)
Other comprehensive income			0				0
Comprehensive Loss		$	(549	)		$	(1,344	)
Loss Per Share:
Continuing Operations:
Basic		$	(0.06	)		$	(0.06	)
Diluted		$	(0.06	)		$	(0.06	)
Discontinued Operations:
Basic		$	(0.02	)		$	(0.13	)
Diluted		$	(0.02	)		$	(0.13	)
Net Loss:
Basic		$	(0.08	)		$	(0.19	)
Diluted		$	(0.08	)		$	(0.19	)
Weighted-Average Common Shares Outstanding:
Basic			7,041				7,033
Diluted			7,041				7,033

 

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				Accumulated Other Comprehensive Income				Total Shareholders’ Equity
		Shares				Amount
JUNE 30, 2024			7,041			$	3,521			$	10,747			$	1,478			$	227			$	15,973
Net loss			0				0				0				(549	)			0				(549	)
SEPTEMBER 30, 2024			7,041			$	3,521			$	10,747			$	929			$	227			$	15,424
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

 

See notes to condensed consolidated financial statements.

---

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

		Three Months
		September 30,
		2024				2023
Net Cash Used in Operating Activities		$	(915	)		$	(1,137	)
Cash Flows Provided by (Used in) Investing Activities:
Expenditures for property, plant and equipment - continuing operations			(191	)			(476	)
Expenditures for property, plant and equipment - discontinued operations			0				(53	)
Proceeds from sale of property, plant and equipment - continuing operations			401				5
Proceeds from sale of investment in minority owned equity investment			1,064				0
Net Cash Provided by (Used in) Investing Activities			1,274				(524	)
Cash Flows Provided by (Used in) Financing Activities:
Proceeds from share options exercises			0				6
Payments on long-term debt - discontinued operations			0				(11	)
Net Cash Used in Financing Activities			0				(5	)
Net Increase (Decrease) in Cash and Cash Equivalents			359				(1,666	)
Cash and Cash Equivalents Beginning of Period			7,170				4,486
Cash and Cash Equivalents End of Period		$	7,529			$	2,820
Supplemental Disclosure of Cash Flow Information:
Cash Paid (Received) for:
Interest		$	(58	)		$	(22	)
Income taxes		$	0			$	43
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities		$	37			$	18

 

See notes to condensed consolidated financial statements.

---

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED SEPTEMBER 30, 2024

(all dollar amounts in thousands except per share amounts)

(Unaudited)

---

 

---

 

---

---

 

 

---

 

---

 

---

During the three months ended September 30, 2023, the Company recorded a refund received of $321 as revenue for a sales tax refund which was received in October 2023.

---

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.” Throughout this quarterly report and the notes to the condensed consolidated financial statements, SunLink Health Systems, Inc., and its consolidated subsidiaries are referred to on a collective basis as “SunLink”, “we”, “our”, “ours”, “us” or the “Company.” This drafting style is not meant to indicate that SunLink Health Systems, Inc. or any particular subsidiary of SunLink Health Systems, Inc. owns or operates any asset, business, or property. Healthcare services, pharmacy operations and other businesses described in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors that could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance, and achievements to differ materially from those anticipated, include, but are not limited to:

General Business Conditions

Operational Factors

---

Liabilities, Claims, Obligations and Other Matters

 

Regulation and Governmental Activity

---

Strategic Initiatives - Merger, 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 our annual report and quarterly reports 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 annual and quarterly reports 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. 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 (the "Board of Directors" or the "Board") believes management of the Company should, among other things, actively pursue one or more extraordinary corporate transactions, any of which transactions may involve merger or consolidation with a third party, as a result of which the Company's shareholders may not hold a majority of the equity in, or otherwise control the resulting entity. The Company is seeking to achieve a merger or other transaction which, among other things, provides the potential for growth in shareholder value on what it believes is a reasonable risk/reward basis.

On January 22, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. (“Southern”), reached revised agreements (the "Revised Agreements") for the sale of Trace Regional Hospital, a vacant medical office building and three (3) patient clinics in Chickasaw County, MS, (collectively “Trace”) to Progressive Health of Houston, LLC (“Progressive”) pursuant to which (i) Southern sold certain personal and intangible property to Progressive for $500 under to an asset purchase agreement ('Trace Hospital Assets Sale"), (ii) entered into a six-month net lease of the real property of the hospital, medical office building and the clinics real property (the "Trace Real Estate") for $20 per month, (iii) entered into a contract to sell the Trace Real Estate to Progressive (the "Trace Real Estate Sale") for $2,000 and (iv) engaged Progressive under a management agreement to manage the operations of Trace pending receipt of certain regulatory approvals, which were received February 29, 2024.

---

The Company recorded a loss of $962 on the Trace Hospital Assets Sale during the year ended June 30, 2024, which included sale expenses of $174. The Trace Real Estate Sale was completed on October 9, 2024. The Company reported an additional asset impairment reserve of $44 in the quarter ended September 30, 2024 for transaction expenses incurred at the sale date. SunLink earlier reported an impairment loss of $1,974 at December 31, 2023 to reduce the net value of the Trace hospital assets to the estimated sale proceeds under the revised agreement. An impairment reserve of $1,739 remains at September 30, 2024 for the Trace Real Estate Sale assets. On June 3, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. and an affiliate completed the sale of its Trace Extended Care & Rehab senior care facility and related real estate in Houston, Mississippi for approximately $7,100 (the "Trace Extended Care Facility Sale"). The net proceeds of approximately $6,522 have been retained for working capital and general corporate purposes. The Company recorded a gain of $5,584 during the fiscal year ended June 30, 2024 on the Trace Extended Care Facility Sale, which included sale expenses of $578.

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.

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 2024 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, 2024 continued to be negatively impacted by the effects of the aftermath of the COVID-19 pandemic, although mitigated somewhat from prior quarters, including among other factors, difficulty hiring qualified employees, rising labor and supply costs and supply chain challenges resulting in inability to obtain pharmacy and DME products on a timely, cost effective basis.

 

		Three Months Ended
		September 30,
		2024				2023				% Change
Net Revenues		$	7,923			$	8,555				(7.4	)%
Costs and expenses			(9,117	)			(9,005	)			1.2	%
Operating loss			(1,194	)			(450	)			165.3	%
Interest income (expense) - net			58				22				163.6	%
Gain on sale of assets			694				2			NA
Loss from continuing operations before income taxes		$	(442	)		$	(426	)			3.8	%

 

---

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, 2024 and 2023:

 

		Three Months Ended
		September 30,
		2024				2023
Medicare		$	3,719			$	3,830
Medicaid			1,726				1,650
Retail and Institutional Pharmacy			1,796				1,704
Private Insurance			467				1,170
Self-pay			197				180
Other			18				21
Total Net Revenues		$	7,923			$	8,555

Pharmacy net revenues for the three month period ended September 30, 2024 decreased $632 or 7% from the three month period ended September 30, 2023. The revenues for the three months ended September 30, 2023 include $321 of prior period sales tax refunds. The decrease in pharmacy net revenues for the three months period ended September 30, 2024 compared to the same period last fiscal year resulted from lower retail pharmacy scripts filled and lower durable medical equipment ("DME") orders shipped. Institutional pharmacy scripts filled increased 10% in the three months ended September 30, 204 compared to the three months ended September 30, 2023.

Costs and expenses, including depreciation and amortization, were $9,117 and $9,005 for the three months ended September 30, 2024 and 2023, respectively.

 

		Cost and Expenses as a % of Net Revenues
		Three Months Ended
		September 30,
		2024				2023
Cost of goods sold			56.5	%			55.8	%
Salaries, wages and benefits			38.9	%			30.6	%
Supplies			0.4	%			0.4	%
Purchased services			4.1	%			3.3	%
Other operating expenses			10.2	%			10.6	%
Rent and lease expense			1.2	%			1.1	%
Depreciation and amortization expense			4.0	%			3.5	%

 

Almost all categories of costs and expenses increased as a percent of net revenues in the three ended September 30, 2024 compared to the prior fiscal year due to the decreased net revenues this year. Cost of goods sold decreased 6% in total due to the reduced volume. Salaries, wages and benefits ("SWB") increased in total for the three ended September 30, 2024 compared to the prior period last year due to higher salaries and wages required in connection with current labor markets and operating challenges of labor allocation relating to the pandemic aftereffects, including the use of contract labor and higher employee benefit costs. Depreciation expense also increased this year due to the $1,467 of capital expenditures last fiscal year.

Operating Profit (Loss)

 

The Company reported an operating loss of $1,194 for the three months period ended September 30, 2024 compared to an operating loss of $450 for the three months period ended September 30, 2023. The increased operating loss for the three months ended September 30, 2024 compared to the three months period ended September 30, 2023 resulted from the 7% decrease in net revenues this quarter and increased costs as a percentage of net revenues.

Gain on Sale of Assets

On August 2, 2024, the Company sold its all its minority equity ownership investment in a subsidiary to the majority owner for cash of $1,064 which resulted in a pre-tax gain on the sale of $665 for the quarter ended September 30, 2024.

---

On September 6, 2024, the Company sold 24.7 acres of undeveloped land for cash of $401 which resulted in a pre-tax gain on the sale of $29 for the quarter ended September 30, 2024.

 

Income Taxes

 

No income tax expense was recorded for continuing operations for the three months ended September 30 2024. Income tax expense of $2 (all state income taxes) was recorded for continuing operations for the three months ended September 30 2023.

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

At September 30, 2024, consistent with the above process, we evaluated the need for a valuation allowance against our deferred tax assets and determined that it was more likely than not that none of our deferred tax assets would be realized. As a result, in accordance with ASC 740, we recognized a valuation allowance of $8,183 against the deferred tax asset so that there is no net long-term deferred income tax asset at September 30, 2024. We conducted our evaluation by considering available positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. A long-term deferred tax liability of $69 is recorded within other noncurrent liabilities in the accompanying condensed consolidated balance sheet of September 30, 2024 to reflect the deferred tax liability for the non-amortizing trade name intangible asset.

The principal negative evidence that led us to determine at September 30, 2024 that all the deferred tax assets should have full valuation allowances was historical tax losses and the projected current fiscal year tax loss. For purposes of evaluating our valuations allowances, the Company’s history of losses represent significant historical negative evidence and we have recognized none of our federal income tax net operating loss carry-forward of approximately $26,502.

For federal income tax purposes, at September 30, 2024, the Company had approximately $26,502 of estimated net operating loss carry-forwards available for use in future years subject to the possible limitations of the provisions of Internal Revenue Code Section 382. These net operating loss carryforwards expire primarily in fiscal year 2025 through fiscal year 2038; however, with the enactment of the Tax Cut and Jobs Act on December 22, 2017, federal net operating loss carryforwards generated in taxable years beginning after December 31, 2017 now have no expiration date. The Company’s returns for the periods prior to the fiscal year ended June 30, 2020 are no longer subject to potential federal and state income tax examination. Net operating loss carry-forwards generated in tax years prior to June 30, 2020 are still subject to redetermination in potential federal income tax examination.

 

Loss from Continuing Operations after Income Taxes

The loss from continuing operations after income taxes was $442 for the three month period ended September 30, 2024 compared to a loss from continuing operations after income taxes of $428 for the three month period ended September 30,2023. The decreased loss in the current quarter resulted from the $694 of gains on asset sales.

Loss from Discontinued Operations after Income Taxes

The loss from discontinued operations after income taxes was $107 for the quarter September 30, 2024 compared to a loss from discontinued operations after income taxes of $916 for the three month period ended September 30, 2023. The loss this year results from transaction costs for the sale of the Trace Real Estate which was closed on October 9, 2024 and additional reserves for uncollectible receivables retained on the sale of the nursing home last fiscal year. The loss for the three months ended September 30, 2023 results from primarily from the loss incurred by the operations of the Trace hospital and nursing home.

---

Discontinued Operations

 

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

 

Sale of Trace Regional Hospital, medical office building, three patient clinics, and Trace Extended Care operations –On January 22, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. (“Southern”), reached revised agreements (the "Revised Agreements") for the sale of Trace Regional Hospital, a vacant medical office building and three (3) patient clinics in Chickasaw County, MS, (collectively “Trace”) to Progressive Health of Houston, LLC (“Progressive”) pursuant to which (i) Southern sold certain personal and intangible property to Progressive for $500 under to an asset purchase agreement ('Trace Hospital Assets Sale"), (ii) entered into a six-month net lease of the real property of the hospital, medical office building and the clinics real property (the "Trace Real Estate") for $20 per month, (iii) entered into a contract to sell the Trace Real Estate to Progressive (the "Trace Real Estate Sale") for $2,000 and (iv) engaged Progressive under a management agreement to manage the operations of Trace pending receipt of certain regulatory approvals, which were received February 29, 2024. The Company recorded a loss of $962 on the Trace Hospital Assets Sale during the year ended June 30, 2024, which included sale expenses of $174. The Trace Real Estate Sale was completed on October 9, 2024. The Company reported an additional asset impairment reserve of $44 in the quarter ended September 30, 2024 for transaction expenses incurred at the sale date. SunLink earlier reported an impairment loss of $1,974 at December 31, 2023 to reduce the net value of the Trace hospital assets to the estimated sale proceeds under the Revised Agreement. An impairment reserve of $1,739 remains at September 30, 2024 for the Trace Real Estate Sale assets. On June 3, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. and an affiliate completed the sale of its Trace Extended Care & Rehab senior care facility and related real estate in Houston, Mississippi for approximately $7,100 (the "Trace Extended Care Facility Sale"). The net proceeds of approximately $6,522 have been retained for working capital and general corporate purposes. The Company recorded a gain of $5,584 during the fiscal year ended June 30, 2024 on the Trace Extended Care Facility Sale, which included sale expenses of $578.

Sold Hospitals– Subsidiaries of the Company have sold substantially all the assets of five (5) other 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 discontinued operations for this segment for the three months ended September 30, 2024 and 2023, respectively.

 

Net Loss

 

Net loss for the three months period ended September 30, 2024 was $549 (or a loss of $0.08 per fully diluted share) as compared to a net loss of $1,344 (or a loss of $0.19 per fully diluted share) for the three months period ended September 30, 2023.

 

Liquidity and Capital Resources

Overview

The Company and its subsidiaries' primary source of liquidity for working capital and operational needs, and for general corporate purposes, is unrestricted cash on hand, which was $7,529 at September 30, 2024, and the proceeds of approximately $1,932 from the sale of the Trace Real Estate on October 9, 2024.

---

From time-to-time, we may, nevertheless, seek to obtain financing for the liquidity needs of the Company or individual subsidiaries

Subject to the effects, risks and uncertainties associated with the aftermath of the COVID-19 pandemic , we believe, as discussed further below, that we have adequate 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 noncancelable operating leases from continuing operations at September 30, 2024 were as follows:

Payments due within:					Operating Leases
1 year					$	339
2 years						122
3 years						23
4 years						4
5 years						0
Over 5 years						0
					$	488

 

As of September 30, 2024, we had no outstanding debt.

The Company currently expects its pharmacy business to purchase approximately $800 of capitalizable DME by the pharmacy operations (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. The pharmacy business also has a $50 capital commitment for the upgrade of its drug compounding facility. 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 2024 and 2023. 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 fiscal year ended June 30, 2024, subject to further operating and administrative cost increases, and other settlements of cost reports and other liabilities in the ordinary course of business as well as cash receipts and disbursements relating to possible asset sales. 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, 2024. Other than with respect to scheduled cash expenditures (based on current operating levels) for operating leases, and the specific items previously disclosed here, as well as continued uncertainties relating to the aftereffects of the COVID-19 pandemic and asset sales, the Company is currently unaware of other trends or unusual uncertainties that are likely to cause a material change in its cash expenditures in periods beyond the next twelve months. See Note 9, to our condensed consolidated 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 2023 and 2024 to date will mitigate or accelerate.

---

Related Party Transactions

A former director of the Company, who resigned in July 2024, is senior counsel in a law firm which provides services to SunLink. The Company expensed an aggregate of $161 and $187 for legal services to this law firm in the three months ended September 30, 2024 and 2023. Included in the Company’s condensed consolidated balance sheets at September 30, 2024 and June 30, 2024 is outstanding legal expenses to this firm $173 and $156, 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, 2024

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

Based on an evaluation of the effectiveness of disclosure controls and procedures performed in connection with the preparation of this Form 10-Q, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2024.

Changes in Internal Control Over Financial Reporting

There were no changes during the quarter ended September 30, 2024 in our internal control over financial reporting that materially affected, or is believed likely to materially affect, our internal controls over financial reporting.

---

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, 2024. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

During the quarter ended September 30, 2024, there were no material changes to the procedures by which SunLink’s security holders may recommend nominees to SunLink’s board of directors, During the quarter ended September 30, 2024, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) informed us of the adoption, modification, or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408(c).

---

 

ITEM 6. EXHIBITS

Exhibits:

3.3		Articles of Incorporation of SunLink Health Systems, Inc. (incorporated by reference to: (i) Exhibit A to Annex A of the Company’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 27, 2023)
3.4		Bylaws of SunLink Health Systems, Inc. (incorporated by reference to Exhibit B to Annex A of the Company’s Proxy Statement filed on Schedule 14A with the Securities and Exchange Commission on September 27, 2023)
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 months ended September 30, 2024, formatted in iXBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2024 (unaudited) and June 30, 2024, (ii) Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) for the three months ended September 30, 2024 and 2023 (unaudited), (iii) Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2024 and 2023 (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: November12, 2024

---