SUNLINK HEALTH SYSTEMS INC – 10-Q – 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 Annual 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

• general economic and business conditions in the U.S., both nationwide and

in the states in which we operate;

• the effects of the coronavirus ("COVID-19") pandemic, both nationwide and

in the states in which we operate, including among other things, on demand

for our customary services, the efficiency of such services, availability

of staffing, availability of supplies, costs and financial results;

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

including the large number of unvaccinated persons in Louisiana and

Mississippi, the primary states in which we conduct healthcare operations;

• increases in uninsured and/or underinsured patients due to COVID,

unemployment or other conditions, higher deductibles and co-insurance, or

other terms of health insurance and drug coverage resulting in higher bad

debt amounts;

• the competitive nature of the 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;


    •   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.; and

• fluctuations in the market value of equity securities including SunLink

        common shares.


Operational Factors

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

        the healthcare business;


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• the availability of, and our ability to attract and retain, sufficient

qualified staff physicians, management, nurses, pharmacists, and staff

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

mandates on our ability to attract and retain such persons;

• timeliness and amount of reimbursement payments received under government

        programs;


    •   changes in interest rates under any lending agreements and other
        indebtedness;

• the ability or inability to refinance or pay principal on existing

indebtedness and/or any existing or potential defaults under existing

indebtedness;

• the lack of availability of future governmental support that may be

required to offset the continuing effect of the COVID-19 pandemic and

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

to meet the usage or forgiveness requirements;

• the ability to achieve compliance with requirements for the expenditure

and retention of PRF funds:

• restrictions imposed by existing or future lending agreements or other

indebtedness;

• the cost and availability of insurance coverage including professional

liability (e.g., medical malpractice) and general, employment, fiduciary,

and other liability insurance;

• the efforts of insurers, healthcare providers, and others to contain

healthcare costs;

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

of patients in alternative or lower acuity healthcare settings, such as

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


  • changes in medical and other technology;


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

• changes in prices of materials and services utilized in our Healthcare

Services and Pharmacy segments;

• changes in wages as a result of inflation or competition for physician,

nursing, pharmacy, management, and staff positions;

• changes in the amount and risk of collectability of accounts receivable,

including deductibles and co-pay amounts;

• the functionality of or costs with respect to our information systems for

our Healthcare Services and Pharmacy segments and our corporate office,

including both software and hardware;

• the availability of and competition from alternative drugs or treatments

to those provided by our Pharmacy segment;

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

Pharmacy segment imposed by pharmacy benefit managers, drug manufacturers,

and distributors; and

• the ability of our Pharmacy segment to sustain its claims for exemption

from sales taxes position in Louisiana on any revenue from sales of

products and services to beneficiaries of government insurance programs to

the extent reimbursed by administrators of such programs.

Liabilities, Claims, Obligations and Other Matters

• claims under leases, guarantees, disposition agreements, and other

obligations relating to asset sales or discontinued operations, including

claims from sold or leased facilities and services, retained liabilities

or retained subsidiaries;

• potential adverse consequences of any known and unknown government

investigations;

• claims for product and environmental liabilities from continuing and

discontinued operations;

• professional, general, and other claims which may be asserted against us,

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


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

Regulation and Governmental Activity

  • existing and proposed governmental budgetary constraints;


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

• the continuing decision by 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;

• 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; EHR reimbursement and indigent care

reimbursements (Medicare Upper Payment Limit "UPL" and Disproportionate

        Share Hospital "DSH" adjustments) and governmental assessments for such
        programs;

• changes in or failure to comply with federal, state or local laws and

regulations and enforcement interpretations of such laws and regulations

affecting our Healthcare Services and Pharmacy segments; and

• the possible enactment of additional federal healthcare reform laws or

reform laws in states where our subsidiaries operate hospital and pharmacy

facilities (including Medicaid waivers, bundled payments, managed care

programs, accountable care and similar organizations, competitive bidding

and other reforms).

Dispositions, Acquisition and Renovation Related Matters

• the ability to dispose of underperforming facilities and business segments;

• the availability of cash and the terms of capital to fund acquisitions,

improvements, renovations or replacement facilities; and

• competition in the market for acquisitions of hospitals, rehabilitation

centers, nursing homes, pharmacy facilities, and other healthcare

businesses.

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

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

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Business Strategy: Operations, Dispositions and Acquisitions

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

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

COVID-19 Pandemic and CARES Act Funding

COVID-19 was declared a global pandemic by 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 public and
certain governmental responses to it have negatively affected our last eight
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.

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

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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 December 31, 2021 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 $5,546 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 PPP loans provided under the CARES Act. These loans were
forgivable upon compliance with conditions specified under the PPP loan program.
As of December 31, 2021, 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.



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 HHS. We continue to monitor compliance
with the terms and conditions of the PRF and 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 the COVID-19 pandemic to our
results, see Risk Factors in Part II, Item 1A of this Form 10-Q.

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.

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Financial Summary

The Company's operations for the six months ended December 31, 2021 continued to
be impacted by the COVID-19 pandemic.

The results of continuing operations shown in the financial summary below are
for our two business segments, Healthcare Services and Pharmacy.

                                             Three Months Ended                           Six Months Ended
                                                December 31,                                December 31,
                                     2021          2020         % Change         2021          2020         % Change
Net Revenues - Healthcare
Services                           $   3,335     $   3,368           (1.0 )%   $   6,833     $   6,833              -
Net Revenues - Pharmacy                7,076         6,782            4.3 %       14,103        13,739            2.6 %
Total Net Revenues                    10,411        10,150            2.6 %       20,936        20,572            1.8 %
Costs and expenses                   (11,483 )     (10,404 )         10.4 %      (23,001 )     (21,149 )          8.8 %
Operating profit (loss)               (1,072 )        (254 )        322.0 %       (2,065 )        (577 )        257.9 %
Interest income (expense) - net           (3 )          (7 )        (57.1 )%         (17 )         (14 )         21.4 %
Federal stimulus - Provider
relief funds                             614         3,417          (82.0 )%         614         3,448          (82.2 )%
Forgiveness of PPP loans and
accrued interest                           0             0             NA          3,010             0             NA
Gain on sale of assets                     7             5           40.0 %           12            13           (7.7 )%
Earnings from continuing
operations before income taxes     $    (454 )   $   3,161             NA      $   1,554     $   2,870          (45.9 )%




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 six
months ended December 31, 2021 and 2020:

                                      Three Months Ended          Six Months Ended
                                         December 31,               December 31,
                                       2021          2020         2021         2020
Medicare                            $    5,292     $  4,715     $ 10,347     $  9,248
Medicaid                                 2,699        2,600        5,067        5,221

Retail and Institutional Pharmacy 1,396 1,395 2,963

3,085

Managed Care & Other Insurance           1,074        1,289        2,394        2,721
Self-pay                                   (81 )        121          103          221
Other                                       31           30           62           76
Total Net Revenues                  $   10,411     $ 10,150     $ 20,936     $ 20,572




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 customers and SunLink
subsidiaries and two subsidiaries holding undeveloped real estate. Healthcare
Services net revenues decreased $33, or 1%, for the three months period ended
December 31, 2021 and was equal to the six months period ended December 31,
2021. Hospital patient days and clinic visit increases were offset by decreases
in extended care patient days.



Pharmacy segment net revenues for the three months period ended December 31,
2021 increased $294, or 4.3% from the three months period ended December 31,
2020. Institutional pharmacy sales increased 10.4% for the three month period
ended December 31, 2020 from the prior year period due to a 6% increase in both
scripts filled and per script net revenues. The prior year's quarter was
adversely affected of Hurricane Laura and Delta. Durable Medical Equipment sales
increased 1.2% for the three month period ended December 31, 2021 from the prior
year period primarily due to higher respiratory equipment net revenue. Retail
pharmacy sales decreased 1.2% for the three month period ended December 31, 2021
from the prior year period due to lower revenue per script despite a 5.2%
increase in retail pharmacy scripts filled.

Pharmacy segment net revenues for the six months period ended December 31, 2021
increased $364, or 2.6% from the six months period ended December 31, 2020.
Institutional pharmacy sales increased 4.4% for the six month

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period ended December 31, 2020 from the prior year period due to a 3.3% increase
in per script net revenues. Durable Medical Equipment sales increased 3.8% for
the six month period ended December 21 2021 from the prior year period as orders
increased 12.2% this year, primarily due to higher respiratory equipment orders.
Retail pharmacy sales decreased 2.3% for the six month period ended December 31,
2021 from the prior year period due to lower revenue per script.

Costs and expenses, including depreciation and amortization, were $11,483 and
$10,404 for the three months ended December 31, 2021 and 2020, respectively.
Costs and expenses, including depreciation and amortization, were $23,001 and
$21,149 for the six months ended December 31, 2021 and 2020, respectively.



                                                        Cost and Expenses
                                                     as a % of Net Revenues
                                          Three Months Ended          Six Months Ended
                                             December 31,               December 31,
                                          2021           2020         2021          2020
Cost of goods sold                           38.6 %        38.6 %        38.4 %      38.8 %
Salaries, wages and benefits                 46.0 %        41.6 %        45.3 %      41.8 %
Supplies                                      3.0 %         2.8 %         2.9 %       2.5 %
Purchased services                            7.6 %         6.2 %         7.9 %       6.2 %
Other operating expenses                     10.6 %         9.0 %        10.4 %       9.1 %
Rent and lease expense                        1.2 %         1.2 %        

1.4 % 1.4 %
Depreciation and amortization expense 3.6 % 3.1 % 3.3 % 3.0 %

Salaries, wages, and benefits increased as a percent of net revenues for the
three and six months period ended December 31, 2021 compared to same period last
fiscal year due to higher salaries and wages due to labor market conditions,
operating challenges of labor allocation relating to the pandemic, including
contract labor, and higher employee health claims expenses. Supplies expenses
have 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 and increased cost of software support services of the
Healthcare Services segment. Other operating expenses increased as percent of
net revenues during the current year's fiscal periods this year due to the
increased cost of insurance. Depreciation expense also increased as a percentage
of net revenue this year due to the $2,595 of capital expenditures last fiscal
year.

Operating Profit (Loss)



The Company reported an operating loss of $1,072 for the three month period
ended December 31, 2021 compared to an operating loss of $254 for the three
month period ended December 31, 2020. The Company reported an operating loss of
$2,065 for the six month period ended December 31, 2021 compared to an operating
loss of $577 for the six month period ended December 31, 2020. Such operating
loss for the three and six month periods ended December 31, 2021 was primarily a
result of higher operating costs not covered by the slightly higher revenues.

Forgiven of PPP loans and accrued interest

       During the six months ended December 31, 2021, $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 six months ended
December 31, 2021.

Other Income - Federal Stimulus - Provider relief funds

As part of the CARES Act, two subsidiaries have received PRF payments. The
Company recognized $614 and $3,417 during the three months ended December 31,
2021 and 2020 respectively. The Company recognized $614 and $3,448 during the
six months ended December 31, 2021 and 2020 respectively.

Interest Income (Expense) -Net

Interest expense, net, was $3 for the three months period ended December 31,
2021 compared to interest expense, net, of $7 for the three months period ended
December 31, 2020, respectively. Interest expense, net, was

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$17 for the six months period ended December 31, 2021 compared to interest
income, net, of $14 for the six months period ended December 31, 2020,
respectively.

Income Taxes



Income tax expense of $23 (all state taxes) and $15 (all state taxes) was
recorded for continuing operations for the three months ended December 31, 2021
and 2020, respectively. Income tax expense of $25 (all state taxes) and $15 (all
state taxes) was recorded for continuing operations for the six months ended
December 31, 2021 and 2020, respectively.



Of the CARES Act provisions, 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 December 31, 2021 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 December 31, 2021
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 December 31, 2021, 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
$7,121 against the deferred tax asset so that there is no net long-term deferred
income tax asset or liability at December 31, 2021. 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.

The principal negative evidence that led us to determine at December 31, 2021
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 $16,957.



For federal income tax purposes, at December 31, 2021, the Company had
approximately $16,957 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.





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Earnings (Loss) from Continuing Operations after Income Taxes

The loss from continuing operations after income tax was $477 for the three
months ended December 31, 2021 as compared to earnings from continuing
operations after income tax of $3,074 for the three months ended December 31,
2020. Earnings from continuing operations after income tax was $1,346 for the
six months ended December 31, 2021 as compared to earnings from continuing
operations after income tax of $2,734 for the six months ended December 31,
2020. 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 $116 for the three
month period ended December 31, 2021 compared to a loss from discontinued
operations after income taxes of $72 for the three months period ended December
3, 2020. The loss from discontinued operations after income taxes was $183 for
the six month period ended December 31, 2021 compared to a loss from
discontinued operations after income taxes of $121 for the six months period
ended December 31, 2020. 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 six months ended
December 31, 2021 and 2020, respectively.

Net Earnings (Loss)

Net loss for the three months period ended December 31, 2021 was $593 (a loss of
$0.07 per fully diluted share) as compared to net earnings of $3,074 ($0.46 per
fully diluted share) for the three months period ended December 31, 2020. Net
earnings for the six months period ended December 31, 2021 was $1,346 ($0.19 per
fully diluted share) as compared to net earnings of $2,734 ($0.40 per fully
diluted share) for the three months period ended December 31, 2020.

Liquidity and Capital Resources

Overview

Our primary source of liquidity is unrestricted cash on hand, which was $8,315
at December 31, 2021. 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

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the public or private markets on what it considers acceptable terms is
uncertain, and due to the COVID-19 pandemic and related factors, may be
non-existent.

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, noncancelable operating leases and interest on outstanding debt from
continuing operations at December 31, 2021 were as follows:

                                                   Interest on
Payments           Long-Term       Operating       Outstanding
due within:           Debt          Leases            Debt
1 year             $       38     $       308     $           4
2 years                    36             265                 2
3 years                     0             252                 0
4 years                     0             221                 0
5 years                     0              35                 0
Over 5 years                0               5                 0
                   $       74     $     1,086     $           6

As of December 31, 2021, we had outstanding debt of $74 of capital lease debt.

     At December 31, 2021, the Company has approximately $381 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 $381 committed to the Trace Forward
Capital Plan, at December 31, 2021, the Company also expects to purchase
approximately $550 capitalizable durable medical equipment 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 which we expect to
collect in the next 12 months. Settlement refund claimed in amended local sales
tax returns in Louisiana could result in additional cash receipts 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 December 31, 2021, subject to
further operating and administrative cost increases, and other cost reports,
CARES Act grants, PPP funds and ERC claims. There have been no material changes
outside the ordinary course of business relating to our upcoming cash
obligations which have occurred during the six months ended December 31, 2021.
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 specific items previously disclosed here, as well as
continued uncertainties relating to the continuing impact of the COVID-19
pandemic, the Company is currently unaware of other trends or unusual
uncertainties that are likely to cause a material change in its cash
expenditures in periods beyond the next twelve months. See Notes 7, 9, 10, and
11 to our financial statements. The Company is also unaware of events that are
reasonably likely to cause a material change in the relationship between its
costs and revenues (such as known or reasonably likely future increases in costs
of labor or materials, price increases or inventory adjustments, beyond those
discussed herein); however, we are unable

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to predict with any degree of accuracy whether, or the extent to which, recent
inflationary price trends in 2021 are transitory or reflect the beginning of an
inflationary cycle.

Related Party Transactions

A director of the Company is a member of a law firm which provides services to
SunLink. The Company expensed an aggregate of $61 and $16 for legal services to
this law firm in the three months ended December 31, 2021 and 2020,
respectively. The Company expensed an aggregate of $111 and $71 for legal
services to this law firm in the six months ended December 31, 2021 and 2020,
respectively.  Included in the Company's condensed consolidated balance sheets
at December 31, 2021 and June 30, 2021 is $58 and $21, respectively, of amounts
payable to this law firm.