SUNLINK HEALTH SYSTEMS INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (in thousands of dollars, except per share and admissions data) (Form 10-Q)


Forward-looking statements

This Quarterly Report and the documents that are incorporated by reference in
this Quarterly Report contain certain forward-looking statements within the
meaning of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include all statements that do not relate solely to historical or current facts
and may be identified by the use of words such as "may," "believe," "will,"
"seeks to", "expect," "project," "estimate," "anticipate," "plan" or "continue."
These forward-looking statements are based on the current plans and expectations
and are subject to a number of risks, uncertainties and other factors which
could significantly affect current plans and expectations and our future
financial condition and results. Throughout the notes to the condensed
consolidated financial statements, SunLink Health Systems, Inc., and its
consolidated subsidiaries are referred to on a collective basis as "SunLink",
"we", "our", "ours", "us" or the "Company." This drafting style is not meant to
indicate 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

• the general economic and commercial conditions in WEnationally and

in the states in which we operate;

• the effects of the coronavirus (“COVID-19”) pandemic, nationally and

in the states where we operate, including, among other things, upon request

for our usual services, the effectiveness of these services, the availability

personnel, availability of supplies, costs and financial results;

• the effects of COVID-19 on our ability to provide usual services

including the large number of unvaccinated and capped or

stagnation in vacancy and recall rates in Louisiana and Mississippithe

Primary states in which we conduct health care operations. Future COVID-19

or other pandemics of other contagious diseases could result in the

unavailability of staff to provide services, regulatory prohibitions

certain services or admissions, decrease in the occupancy rate, increase

our costs, reduce our revenues and otherwise harm our business;

• increase in the number of uninsured and/or underinsured patients due to COVID-19,

unemployment or other conditions, higher deductibles and coinsurance, or

other conditions of health insurance and drug coverage resulting in increased risk

amounts of debts;

• the competitive nature of the WE community hospital, extended care and

rehabilitation centres, retirement homes and pharmacies;

• the demographic characteristics and the evolution of the areas where we operate,

including resistance to COVID-19 vaccination;

• any new variant or sub-variant of the COVID-19 virus and other SARS-COV-2

        viruses and other infectious diseases;


    •   the availability of cash or borrowings to fund working capital,
        renovations, replacements, expansions, and capital improvements at

existing health and pharmacy establishments and for the acquisitions and

        replacement of such facilities;


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

• fluctuations in the market value of equity securities, including SunLink

common stocks, including fluctuations based on real inflation concerns

        or recession.


                                       15

————————————————– ——————————

Operational factors

• the ability or inability to operate profitably in one or more segments of the

the health sector;

• the availability and our ability to attract and retain sufficient

qualified staff doctors, management, nurses, pharmacists and staff

personnel for our operations, including the impact of the COVID-19 vaccination

mandates on our ability to attract and retain these people;

• the speed and amount of refunds received from the government

programs;

• the lack of availability of future government support that could be

necessary to offset the lingering effect of the COVID-19 pandemic and

the absence of forgiveness features in such future loans or an inability

to meet the use of forgiveness requirements;

• the ability to comply with expenditure requirements and

retention of PRF funds;

• the ability or inability to fund our obligations under capital leases or

new or existing obligations and/or any existing or potential breaches

under existing indebtedness;

• restrictions imposed by existing or future contractual obligations

including existing or new debts;

• the cost and availability of insurance coverage, including professional coverage

liability (for example, medical malpractice) and general, employment, fiduciary,

and other liability insurance;

• the efforts of government authorities, insurers, health care providers,

and others to contain health care costs;

• the impact on hospital, clinic and nursing home services of the treatment

patients in alternative or less urgent health care facilities, such as

        with drug therapy or in surgery centers, and urgent care centers,
        retirement homes or at home;


  • changes in medical and other technology;


  • changes in estimates of self-insurance claims and reserves;

• price changes for materials and services used in our healthcare

Services and Pharmacy segments;

• changes in salaries due to inflation or competition for doctors,

nurses, pharmacists, managers and employees;

• changes in the amount and risk of recovery of trade receivables,

including deductibles and co-payments;

• the functionality or costs relating to our information systems for

our Health Services and Pharmaceuticals segments and our head office,

including software and hardware;

• the availability and competition of alternative drugs or treatments

to those provided by our Pharmaceuticals segment;

• the restrictions, recoveries, processes and conditions relating to our

Pharmacy segment imposed by pharmaceutical benefit managers, drug manufacturers,

and distributors; and

• the ability of our Pharmaceuticals segment to sustain its exemption requests

the position of sales taxes in Louisiana on any income from the sale of

products and services to beneficiaries of government insurance programs for

the measure reimbursed by the administrators of these programs.

Responsibilities, Claims, Obligations and Other Matters

• claims under leases, warranties, assignment agreements and other

obligations relating to asset disposals or discontinued operations, including

receivables from facilities and services sold or leased, liabilities retained

or retained subsidiaries;


    •   potential adverse consequences of any known and unknown government
        investigations;


                                       16
--------------------------------------------------------------------------------

• medical malpractice claims and environmental liabilities

continuing and discontinued operations;

• professional, general and other claims that could be invoked against us,

        including claims based on a failure currently unknown to us of our
        physicians and other personnel to comply with COVID-19 vaccination
        mandates; and


    •   natural disasters and weather-related events such as tornados,
        earthquakes, hurricanes, flooding, snow, ice and wind damage, and
        population evacuations affecting areas in which we operate.

Regulation and government activity

  • existing and proposed governmental budgetary constraints;


    •   Federal and state insurance exchanges and their rules relating to
        reimbursement terms;

• the maintenance of the decision by Mississippi (where we operate our rest

hospital and nursing home) not to expand Medicaid;

• the regulatory environment of our activities, including the state certificate

requirement laws and regulations, pharmacy licensing laws and regulations,

rules and court cases relating thereto;

• changes in levels and mandates of government (including Medicare,

Medicaid and other programs) and private reimbursement for SunLink

health services, including payment terms and conditions of

managed care agreements; indigent care and other reimbursements (Medicare

        Upper Payment Limit "UPL" and Disproportionate Share Hospital "DSH"
        adjustments) and governmental assessments for such programs;

• changes in or violation of federal, state or local laws and

regulations and interpretations of application of these laws and regulations

affecting our Healthcare Services and Pharmaceuticals segments; and

• the possible enactment of additional federal health care reform legislation or

reform laws in states where our subsidiaries operate hospitals and pharmacies

facilities (including Medicaid waivers, bundled payments, managed care

programs, responsible care and similar organizations, tenders

and other reforms).

Disposals, Acquisitions and Renovation Issues

• the ability to get rid of underperforming, underperforming installations

lines of business and surplus assets;

• the availability of liquidity and capital conditions to finance acquisitions or

replacement facilities, upgrades or renovations of existing facilities

or both; and

• market competition for hospital acquisitions, rehabilitation

centers, retirement homes, pharmacies and other health care

businesses.


The foregoing are significant factors we think could cause our actual results to
differ materially from expected results. However, there could be additional
factors besides those listed herein that also could affect SunLink in an adverse
manner. You should read this Quarterly Report completely and with the
understanding that actual future results may be materially different from what
we expect. You are cautioned not to unduly rely on forward-looking statements
when evaluating the information presented in this Quarterly Report or our other
disclosures because current plans, anticipated actions, and future financial
conditions and results may differ from those expressed in any forward-looking
statements made by or on behalf of SunLink.

We have not undertaken any obligation to publicly update or revise any
forward-looking statements. All of our forward-looking statements speak only as
of the date of the document in which they are made or, if a date is specified,
as of such date. We disclaim any obligation or undertaking to provide any
updates or revisions to any forward-looking statement to reflect any change in
our expectations or any changes in events, conditions, circumstances or
information on which the forward-looking statement is based, except as required
by applicable law. All subsequent written and

                                       17
--------------------------------------------------------------------------------
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the foregoing factors and
the other risk factors set forth elsewhere in this report and/or in our Annual
Report on Form 10-K.

Business strategy: operations, disposals and acquisitions

The business strategy of SunLink is to focus its efforts on improving the
operations, services and profitability of its existing Healthcare Services and
Pharmacy businesses. While the Company intends primarily to pursue its business
strategy of improving its operations, services and profitability of its existing
businesses, subject to available capital and other resources, the Company also
intends to pursue growth by selective acquisitions in the healthcare and
pharmacy segments. We believe, however, the COVID-19 pandemic has resulted in
substantial additional uncertainties and risks in our businesses which are not
subject to estimation at this time, particularly because the COVID-19 is novel
in nature, uncertain in duration, and materially affected by government actions
related to the pandemic. In response to the pandemic, the Company has
discontinued certain services, laid off or furloughed employees where necessary,
reduced cash outlays where practicable, and deferred other strategic activities.
Our ability to resume the pursuit of our normal business strategy, including
growth initiatives, will depend on the effect of, among other things, the
nature, extent and timing of the existing COVID-19 pandemic, the end thereof,
potential new COVID-19 or other pandemics, and government actions in response
thereto.

The Company expects to use existing cash primarily to sustain it operations in
response to the continuing impact of the COVID-19 pandemic, for growth
initiatives, including acquisitions, when available and appropriate, and for
other general corporate purposes. There is no assurance that any acquisitions or
dispositions of assets will be authorized by the Company's Board of Directors
or, if authorized, that any such transactions will be completed. Although the
Company believes certain portions of its businesses continue to under-perform,
the Company is not currently offering any of its businesses for sale.

Funding for the COVID-19 Pandemic and the CARES Act

COVID-19 was declared a global pandemic by the World Health Organization on
March 11, 2020. We have been monitoring the COVID-19 pandemic and its impact on
our operations, and we have taken significant steps intended to minimize the
risk to our employees and patients. Certain employees have been working
remotely, but we believe these remote work arrangements have not materially
affected our ability to maintain critical business operations, which are being
conducted substantially in accordance with our understanding of applicable
government health and safety protocols and guidance issued in response to the
COVID-19 pandemic, although such protocols and guidance have been subject to
frequent changes and at times have been unclear. Nevertheless, as in many
healthcare environments, we have experienced COVID-19 illness, including deaths,
and some employees have tested positive and were placed on leave or in
quarantine. We believe the effect of the COVID-19 pandemic and certain public
and certain governmental responses to it have negatively affected our last nine
quarter's results.

In late December 2020, we began receiving allotments of COVID-19 vaccine and
have vaccinated patients, providers, employees, and staff in accordance with the
protocols and guidelines in the states where we operate. Not all such
individuals have been vaccinated to date and some individuals have not consented
to vaccination. The Company and its subsidiaries are currently developing and
will implement plans to vaccinate employees to the extent required by the final
rules issued by CMS. The Company believes the vaccine mandates resulted in the
loss of staff, including clinical staff, and together with the current state of
the labor market, have negatively affected the Company's ability to maintain the
current levels of service.

In our Healthcare businesses, we have experienced material reductions in demand
and net revenues due to the COVID-19 pandemic. There continues to be reduced
current demand for certain hospital services, and for extended care,
rehabilitation center and nursing home admissions, and clinic visits. The
availability and cost of medical supplies have adversely affected our Healthcare
businesses, and we continue to monitor supplies and seek additional sources of
many supply items. A reduction in the availability of qualified employees has
also occurred, and, despite good faith efforts to do so, we have not yet been
able to rehire or fully replace staff which were previously furloughed, laid off
or retired.

                                       18
--------------------------------------------------------------------------------
Since the beginning of the COVID-19 pandemic, our Pharmacy business has
experienced reduced sales trends in certain areas, increased costs and reduced
staff. Many of our primary physician referral sources have been operating at
reduced capacity, and until these referral sources resume operating at full
capacity, we believe the COVID-19 pandemic will continue to affect the demand
for DME products and Retail and Institutional Pharmacy drugs and products.
Reductions in employee hours have been made in response to the lower demand.
Extended care facilities and rehabilitation centers, nursing homes and other
customers of our Institutional Pharmacy services continue to be adversely
affected by the COVID-19 pandemic. Our Institutional Pharmacy services have
experienced increased costs and operational inefficiencies due to measures taken
to protect our employees and by access controls and other restrictions
implemented by our institutional customers. The impact of the COVID-19 pandemic
also has negatively affected our supply processes, especially with respect to
access to respiratory equipment and certain personal protective equipment and
cleaning products.

Our Healthcare and Pharmacy segments have received approximately $6,173 in
general and targeted Provider Relief Funds ("PRF") during the period April 1,
2020 through March 31, 2022 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 $5,652 have been recognized since April
l, 2020 as other income under the gain contingency recognition method.

During the quarter ended June 30, 2020, our Healthcare and Pharmacy segments
received $3,234 in Paycheck Protection Plan ("PPP") loans provided under the
CARES Act. These loans were forgivable upon compliance with conditions specified
under the PPP loan program. As of March 31, 2022, all our PPP loans have been
forgiven.

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
has applied for ERC of $3,586 through amended quarterly payroll tax filings for
the applicable quarters. Subsequent to March 31, 2022 through the date of this
filing, the Company has received $1,747 of ERC applied for. We continue to
monitor compliance with the terms and conditions of the ERC and PPP programs and
developing interpretations and enforcement of the ERC and PPP program rules and
the regulations.

PRF distributions are not subject to repayment provided we are able to attest to
and comply with the terms and conditions of the funding, including demonstrating
that the funds received have been used for designated, allowable
healthcare-related expenses and capital expenditures attributable to COVID-19
and for "Lost Revenues" as defined by the department of "HHS". We continue to
monitor compliance with the terms and conditions of the PRF and developing
interpretations and enforcement of PRF rules and regulations, as well as the
impact of the pandemic on our revenues and expenses. If we are unable to attest
to or comply with current or future terms and conditions, and there is no
assurance we will be able to do so, our ability to retain some or all of the PRF
received may be impacted, and we may have to return the unutilized portion of
those funds, if any, in the future.

The Company is unable to determine the extent to which the COVID-19 pandemic
going forward will continue to affect its assets and operations. Our ability to
make estimates of the effect of the COVID-19 pandemic on revenues, expenses or
changes in accounting judgments that have had or are reasonably likely to have a
material effect on our financial statements is currently limited. The nature and
extent of the effect of the COVID-19 pandemic on our balance sheet and results
of operations will depend on the severity and length of the pandemic; government
actions to mitigate the pandemic's effect; regulatory changes in response to the
pandemic, especially those that affect our hospital, extended care,
rehabilitation center, nursing home, clinics, and our pharmacy operations;
existing and potential government assistance that may be provided; and the
requirements of PRF receipts, including our ability to retain such PRF received.

For additional discussion of the risks presented by continuing effects of the
COVID-19 pandemic to our results, see Risk Factors in Part II, Item 1A of this
Form 10-Q.



                                       19
--------------------------------------------------------------------------------

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 2021 Annual
Report on Form 10-K and continue to include the following areas: receivables -
net and provision for doubtful accounts; revenue recognition and net patient
service revenues; goodwill, intangible assets and accounting for business
combinations; professional and general liability claims; and accounting for
income taxes. There have been no material changes in our critical accounting
estimates for the periods presented other than amounts readily computable from
the financial statements included in this form 10-Q.

Financial summary

The activities of the Company for the nine months ended March 31, 2022 continue to be impacted by the effects of the COVID-19 pandemic.

The results from continuing operations presented in the financial summary below relate to our two business segments, health services and pharmaceuticals.

                                            Three Months Ended                          Nine Months Ended
                                                 March 31,                                  March 31,
                                     2022          2021        % Change         2022          2021         % Change
Net Revenues - Healthcare
Services                           $   3,749     $   3,286          14.1 %    $  10,582     $  10,119            4.6 %
Net Revenues - Pharmacy                6,778         6,492           4.4 %       20,881        20,231            3.2 %
Total Net Revenues                    10,527         9,778           7.7 %       31,463        30,350            3.7 %
Costs and expenses                   (11,591 )     (10,318 )        12.3 %      (34,592 )     (31,467 )          9.9 %
Operating loss                        (1,064 )        (540 )        97.0 %       (3,129 )      (1,117 )        180.1 %
Interest income (expense) - net           (1 )          (7 )       (85.7 )%         (18 )         (21 )        (14.3 )%
Federal stimulus - Provider
relief funds                             106            11         863.6 %          720         3,459          (79.2 )%
Forgiveness of PPP loans and
accrued interest                           0             0            NA          3,010             0             NA
Gain on sale of assets                     0             1        (100.0 )%          12            14          (14.3 )%
Earnings (loss) from continuing
operations before income taxes     $    (959 )   $    (535 )          NA      $     595     $   2,335          (74.5 )%




Results of Operations

Our net revenues are from our two business segments, Healthcare Services and
Pharmacy. The Company's revenues by payor were as follows for the three and nine
months ended March 31, 2022 and 2021:
                                      Three Months Ended          Nine Months Ended
                                           March 31,                  March 31,
                                       2022          2021         2022          2021
Medicare                            $     4,288     $ 4,220     $  14,635     $ 13,468
Medicaid                                  2,745       2,658         7,812        7,879

Retail and institutional pharmacy 1,504 1,493 4,467

4,578

Managed Care & Other Insurance            1,257       1,203         3,651        3,924
Self-pay                                    718         120           821          341
Other                                        15          84            77          160
Total Net Revenues                  $    10,527     $ 9,778     $  31,463     $ 30,350



The Healthcare Services segment in the current year is composed of one hospital,
one extended care and rehabilitation center and four clinics, a subsidiary which
provides information technology services to outside

                                       20
--------------------------------------------------------------------------------
customers and SunLink subsidiaries and two subsidiaries holding undeveloped real
estate. Healthcare Services net revenues increased $463, or 14%, for the three
months period ended March 31, 2022 and increased $463, or 5% for the nine months
period ended March 31, 2022 compared to the prior year period. Increased
revenues from increased hospital patient days and clinic visit increases were
partially offset by decreases in revenues from extended care patient days.

Pharmacy segment net revenues for the three months period ended March 31, 2022
increased $286, or 4.4% from the three months period ended March 31, 2021.
Institutional pharmacy sales increased 13.3% for the three month period ended
March 31, 2022 from the prior year period due to a 4.3% increase in per script
net revenues and 10.5% increase in scripts filled. Retail pharmacy sales
increased 4.8% for the three month period ended March 31, 2022 from the prior
year period due to a 3.0% revenue per script filled and a 1.7% increase in
retail pharmacy scripts filled. Durable Medical Equipment ("DME") sales
decreased 5.7% for the three month period ended March 31, 2021 from the prior
year period primarily due to lower net revenue per order filled.

Pharmacy segment net revenues for the nine months period ended March 31, 2022
increased $650, or 3.2% from the nine months period ended March 31, 2021.
Institutional pharmacy sales increased 7.3% for the nine month period ended
March 31, 2022 from the prior year period due to a 6.8% increase in per script
net revenues. Durable Medical Equipment sales increased 0.7% for the nine month
period ended March 31 2022 from the prior year period as orders increased this
year, primarily due to higher respiratory equipment orders. Retail pharmacy
sales decreased 0.1% for the nine month period ended March 31, 2022 from the
prior year period due to lower revenue per script.

Costs and expenses, including depreciation and amortization, were $11,591 and
$10,318 for the three months ended March 31, 2022 and 2021, respectively. Costs
and expenses, including depreciation and amortization, were $34,592 and $31,467
for the nine months ended March 31, 2022 and 2021, respectively.


                                                        Cost and Expenses
                                                      as a % of Net Revenues
                                          Three Months Ended          Nine Months Ended
                                               March 31,                  March 31,
                                          2022           2021         2022           2021
Cost of goods sold                           38.8 %        37.7 %        38.7 %       38.5 %
Salaries, wages and benefits                 45.0 %        43.0 %        45.2 %       42.2 %
Supplies                                      2.6 %         2.4 %         2.8 %        2.4 %
Purchased services                            9.2 %         5.7 %         8.3 %        6.1 %
Other operating expenses                      9.8 %        11.9 %        10.2 %       10.0 %
Rent and lease expense                        1.2 %         1.4 %        

1.3% 1.4% Depreciation 3.7% 3.5% 3.4% 3.2%



Salaries, wages, and benefits increased as a percent of net revenues for the
three and nine months period ended March 31, 2022 compared to same period last
fiscal year due to higher salaries and wages required in connection with current
labor market conditions, operating challenges of labor allocation relating to
the pandemic, including contract labor, and higher employee health claims
expenses. Supplies expenses increased this year due to higher purchase prices
resulting from market demand and supply disruptions. Purchased services costs
increased this year due to increased costs of fuel, the outsourcing at a
Healthcare Services facility of certain services (due to challenges in hiring
labor locally) and increased cost of software support services. Depreciation
expense also increased as a percentage of net revenue this year due to the
$2,436 of capital expenditures for the nine months ended March 31, 2022 and the
$2,595 of capital expenditures last fiscal year.

Operating profit (loss)

The Company reported an operating loss of $1,064 for the three months period
ended March 31, 2022 compared to an operating loss of $540 for the three month
period ended March 31, 2020. The Company reported an operating loss of $3,129
for the nine month period ended March 31, 2022 compared to an operating loss of
$1,117 for the nine month period ended March 31, 2021. Such operating loss for
the three and nine month periods ended March 31, 2022 was primarily a result of
higher operating costs not covered by the slightly higher revenues.

                                       21

————————————————– ——————————

Cancellation of PPP loans and accrued interest

       During the nine months ended March 31, 2022, $2,972 of our PPP loans and
related $38 of accrued interest were forgiven by the SBA and $3,010 was recorded
as income relating to PPP loan forgiveness for the nine months ended March 31,
2022.

Other Revenue – Federal Stimulus – Supplier Relief Fund

Under the CARES Act, two subsidiaries received PRF payments. The Company has recognized $106 and $11 in the three months ended March 31, 2021 and 2020, respectively. The Company has recognized $720 and $3,459 in the nine months ended March 31, 2022 and 2021, respectively.

Interest income (expense) – Net

Interest expense, net, was $1 for the three months period ended March 31, 2022
compared to interest expense, net, of $7 for the three months period ended March
31, 2021, respectively. Interest expense, net, was $18 for the nine months
period ended March 31, 2022 compared to interest income, net, of $21 for the
nine month period ended March 31, 2021, respectively.

Income taxes

Income tax benefit of $25 (all state taxes) and $62 (all state taxes) was
recorded for continuing operations for the three months ended March 31, 2022 and
2021, respectively. No income tax expense and income tax benefit of $47 (all
state taxes) was recorded for continuing operations for the nine months ended
March 31, 2022 and 2021, respectively.

Of the CARES Act provisions, currently, the most material income tax
considerations related to the Company are related to the amounts for ERC and
amounts received as general and targeted PRF. Based on the latest published IRS
guidance as of the preparation of the March 31, 2022 financial statements, PRF
(to the extent the applicable terms and conditions required to retain the funds
are met "Retainable PRF") are fully includable in taxable income in the
Company's tax returns in the fiscal year received. ERC are included in taxable
income in the quarter which the payroll expenses for which the credits offset
are deductible. ERC results in qualified wages being disallowed as a deduction
for the portion of the wages paid equal to the sum of the payroll tax credit
taken in the associated quarter. For amounts received and forgiven under the PPP
loans, due to the enactment of the Consolidated Appropriations Act, 2021, on
December 27, 2020, Congress specifically allows deduction of any expenses
associated with forgiven PPP loan proceeds. It is the Company's assumption at
March 31, 2022 that all PPP Loan associated expenses will be deductible for
income tax.

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

At March 31, 2022, consistent with the above process, we evaluated the need for
a valuation allowance against our deferred tax assets and determined that it was
more likely than not that none of our deferred tax assets would be realized. As
a result, in accordance with ASC 740, we recognized a valuation allowance of
$7,348 against the deferred tax asset so that there is no net long-term deferred
income tax asset or liability at March 31, 2022. We conducted our evaluation by
considering available positive and negative evidence to determine our ability to
realize our deferred tax assets. In our evaluation, we gave more significant
weight to evidence that was objective in nature as compared to subjective
evidence. Also, more significant weight was given to evidence that directly
related to our current financial performance as compared to less current
evidence and future performance.

                                       22
--------------------------------------------------------------------------------
The principal negative evidence that led us to determine at March 31, 2022 that
all the deferred tax assets should have full valuation allowances was the
projected current fiscal year tax loss disregarding unusual items associated
with the CARES Act discussed above, history of losses as well as the underlying
negative business conditions for rural healthcare businesses in which our
Healthcare Services Segment businesses operate and the federal income tax net
operating loss carry-forward of approximately $18,580.


For federal income tax purposes, at March 31, 2022, the Company had
approximately $18,580 of estimated net operating loss carry-forwards available
for use in future years subject to the limitations of the provisions of Internal
Revenue Code Section 382. These net operating loss carryforwards expire
primarily in fiscal 2023 through fiscal 2038; however, with the enactment of the
Tax Cut and Jobs Act 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, 2018 are no longer subject to potential federal and
state income tax examination.

Profit (loss) from continuing operations after income taxes

The loss from continuing operations after income tax was $934 for the three
months ended March 31, 2022 as compared to a loss from continuing operations
after income tax of $473 for the three months ended March 31, 2021. Earnings
from continuing operations after income tax was $595 for the nine months ended
March 31, 2022 as compared to earnings from continuing operations after income
tax of $2,382 for the nine months ended March 31, 2021. The decreased earnings
from continuing operations this year compared to the prior year was due to
higher PRF income recognized last year partially offset by PPP loan forgiveness
this year.

Loss from discontinued operations after income taxes

The loss from discontinued operations after income taxes was $56 for the three
month period ended March 31, 2022 compared to a loss from discontinued
operations after income taxes of $58 for the three months period ended March 31,
2021. The loss from discontinued operations after income taxes was $239 for the
nine month period ended March 31, 2022 compared to a loss from discontinued
operations after income taxes of $179 for the nine month period ended March 31,
2021. The increased loss from discontinued operations this year was due to a
settlement of a workers' compensation claim remaining from a sold business.

Discontinued operations

Sold Hospitals and Nursing Homes- Subsidiaries of the Company have sold
substantially all the assets of four hospitals and a nursing home ("Sold
Facilities") during the period July 2, 2012 to March 17, 2019. The loss before
income taxes on the Sold Facilities results primarily from the effects of
retained professional liability insurance and claims expenses and settlement of
a lawsuit.

Life Sciences and Engineering Segment -SunLink retained a defined benefit
retirement plan which covered substantially all of the employees of this segment
when the segment was sold in fiscal 1998. Effective February 28, 1997, the plan
was amended to freeze participant benefits and close the plan to new
participants. Pension expense and related tax benefit or expense is reflected in
the results of operations for this segment for the three and nine months ended
March 31, 2022 and 2021, respectively.

Net profit (loss)

Net loss for the three months period ended December 31, 2021 was $990 (a loss of
$0.14 per fully diluted share) as compared to net loss of $531 (a loss of $0.08
per fully diluted share) for the three months period ended March 31, 2021. Net
earnings for the nine months period ended March 31, 2021 was $356 ($0.05 per
fully diluted share) as compared to net earnings of $2,203 ($0.32 per fully
diluted share) for the nine months period ended March 31, 2021.

Cash and capital resources

Insight

Our primary source of liquidity is unrestricted cash on hand, which was $7,144
at March 31, 2022. The Company and its subsidiaries currently are funding
working capital needs primarily from cash on hand. From time-to-time, we may,
nevertheless, seek to obtain financing for the liquidity needs of the Company or
individual subsidiaries based

                                       23

————————————————– ——————————

on the anticipated need. However, at this time, the Company’s ability to raise capital (debt or equity) in the public or private markets on terms it considers acceptable is uncertain.

CARES Act Funds - The CARES Act was enacted by the U.S. government on March 27,
2020. Among the relief provided to health care providers under the CARES Act are
grants under PRF and forgivable loans under PPP. We have received a total of
$9,407 under the CARES Act programs consisting of $6,173 in general and targeted
PRF and $3,234 of PPP loans. During the first two calendar quarters of 2021, the
Company became eligible for, and we applied for $3,586 of ERC through amended
quarterly payroll tax filings.

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

Contractual obligations, commitments and contingencies

Contractual obligations, commitments and contingencies related to outstanding debt, non-cancellable operating leases and interest on outstanding debt from continuing operations at March 31, 2022 were the following:

                                                   Interest on
Payments           Long-Term       Operating       Outstanding
due within:           Debt          Leases            Debt
1 year             $       39     $       351     $           3
2 years                    25             336                 1
3 years                     0             322                 0
4 years                     0             245                 0
5 years                     0              10                 0
Over 5 years                0               3                 0
                   $       64     $     1,267     $           4


From March 31, 2022we had an unpaid debt of $64 capital lease debt.

     At March 31, 2022, the Company has approximately $431 of commitments for
future capital expenditures for our Trace hospital under its Trace Forward
Capital Plan which was announced in March 2021. This Plan expands, upgrades and
improves the physical plant, patient care, ancillary services and support areas
of the Trace hospital. In addition to the $431 committed to the Trace Forward
Capital Plan, at March 31, 2022, the Company also expects to purchase
approximately $238 of additional capitalizable DME by the Pharmacy segment (to
be rented to customers) through the end of fiscal 2022. The timing and actual
amount which will be expended is difficult to predict due to various factors
including varying demand for such equipment as well as its availability given
current supply sourcing challenges. The Company anticipates funding such
expenditures primarily from cash on hand. The Company has $3,586 receivable from
the filing of ERC claimed in amended payroll tax returns of which we have
collected $1,747 subsequent to March 31, 2022 through the date of this filing.
We expect to collect the remaining $1,839 receivable in the next 12 months.
Other cash expenditures for the next 12 months currently are expected to be
in-line with expenditures for the quarter ended March 31, 2022, subject to
further operating and administrative cost increases, and other settlements of
cost reports in the ordinary course of business, and the Company's ability to
retain unrecognized CARES Act grants, PPP funds and ERC funds received or
previously received. Other than reported above, there have been no material
changes outside the ordinary course of business relating to our upcoming cash
obligations which have occurred during the nine months ended March 31, 2022.
Other than with respect to scheduled cash expenditures (based on current
operating levels) for long-term debt, operating leases, and interest on current
outstanding debt, the debt, the specific items previously disclosed here, as
well as continued uncertainties relating to the continuing impact of the
COVID-19 pandemic, the Company is currently unaware of other trends or unusual
uncertainties that are likely to cause a material change in its cash
expenditures in periods beyond the next twelve months. See Notes 7, 9, 10, and
11 to our financial statements. The Company is also unaware of events that are
reasonably likely to cause a material change in the relationship between its
costs and revenues (such as known or reasonably likely future increases in costs
of labor or materials, price increases or inventory adjustments, beyond those
discussed herein); however, we are unable

                                       24

————————————————– ——————————

predict with some degree of accuracy whether, or to what extent, recent inflationary price trends in 2021 and 2022 are transitory or reflect the start of an inflationary cycle.

Related party transactions

A director of the Company is a member of a law firm which provides services to
SunLink. The Company expensed an aggregate of $9 and $85 for legal services to
this law firm in the three months ended March 31, 2022 and 2021, respectively.
The Company expensed an aggregate of $120 and $156 for legal services to this
law firm in the nine months ended March 31, 2022 and 2021, respectively.
Included in the Company's condensed consolidated balance sheets at March 31,
2022 and June 30, 2021 is $4 and $21, respectively, of amounts payable to this
law firm.

© Edgar Online, source Previews

Previous NOTE 2 - LIQUIDITY AND MANAGEMENT PLANS
Next Graphic Novel Review: "The Peanut Butter Sisters and Other American Stories" by Rumi Hara of Drawn+Quarterly